51

I'm going through the process of buying a home now. Whenever I make an offer, the seller wants to know how much of that will be down payment.

Why do they care? Isn't the combination of the down payment plus the bank's mortgage payment going to be equal to the full offer? Do the sellers get some advantage from more cash in the down payment?

Improve this question
3
  • 3
    Related: Why does a real estate seller get to know the financing arrangements of the buyer?
    – Ben Miller
    Commented Sep 10, 2019 at 13:06
  • 1
    Just a comment: my wife and I bought with $0 down in a hot market. It's amazing what building a personal relationship with the seller can do for you to get over the traditional 'No money down whaaaa?' feelings.
    – Hueco
    Commented Sep 10, 2019 at 18:09
  • 2
    For car buying, dealerships need to lower the money financed closer to the actual value of the car, or else the banks won't approve the loan.
    – Evorlor
    Commented Sep 11, 2019 at 12:41

6 Answers 6

Reset to default
95

They want to gauge the chance of a successful sale. There's nothing quite as frustrating when selling and moving to a new home as getting into escrow, doing all the paperwork, crossing off all the check lists, only to find out that your buyer didn't qualify for the loan and the mortgage fell through.

By asking about your down payment (20% or more is often the minimum to qualify for a mortgage), the seller will get a sense of how likely you are to be qualified as a buyer.

For example, if you get three offers on your house, all for the same price, and one buyer is financing 80%, one buyer will finance 50%, and one buyer will pay cash for the whole thing, which offer are you most likely to accept and why?

Improve this answer
18
  • 53
    @DavidGrinberg - You can always tell the seller that you are pre-qualified and it is none of their business how much you are putting down. And, risk losing the house because someone else was more forthcoming.
    – Mattman944
    Commented Sep 10, 2019 at 2:47
  • 33
    @DavidGrinberg - A prequalification letter is no guarantee that the financing will come through. It'll come through if all your documentation proves everything the bank is assuming and doesn't reveal some other issues. While most of the time that will be true, it's certainly not 100%. Someone that is bringing a relatively large down payment to the table is much more likely to get through the underwriting process and to do so on time. Someone putting down a minimal down payment is much more likely to have problems turn up or to end up having financing delays.
    – Justin Cave
    Commented Sep 10, 2019 at 3:14
  • 27
    @DavidGrinberg - The down payment amount absolutely influences whether you will be approved and whether you'll be approved by the scheduled closing date. If you have the liquid assets to put down 20%, you have far more room to deal with issues the underwriter finds than someone that is trying to get a loan only putting down 3% half of which is coming as a gift from a parent. Unless you're saying that you tell the seller you're putting down 80% when you're really putting down 3%?
    – Justin Cave
    Commented Sep 10, 2019 at 3:36
  • 25
    @DavidGrinberg - But they are assessing the risk. They're not doing a full underwrite, obviously. But they will absolutely look at the risk markers they can see. The down payment you're making is a strong indicator of your financing risk. As is the mortgage program you're using (i.e. FHA, VA, etc.), whether you have a pre-qualification letter, etc.
    – Justin Cave
    Commented Sep 10, 2019 at 4:14
  • 34
    The seller doesn't literally care about the downpayment, they care about the chances that your mortgage will fall though. And asking about downpayment size is an "easy" and common thing to do, as an indicator of that.
    – dwizum
    Commented Sep 10, 2019 at 10:45
20

If the appraisal is less than the purchase price and the down payment is small, the bank might not approve the mortgage.

Improve this answer
10
  • 16
    @DavidGrinberg The keyword in your comment is "approximate". If the sale price is $500k and the bank's maximum LTV is 80% ($400k), and you have a 20% downpayment ($100k), and the appraisal comes in at $480k, then the bank's maximum loan is now 80% x 480k = $384k, and your $100k downpayment is not sufficient to meet the purchase price. If your downpayment had instead been $116k, then the lower appraisal would not be an issue. Hence from the seller's perspective, $116k (higher downpayment) is better than $100k (lower downpayment).
    – JBentley
    Commented Sep 10, 2019 at 9:15
  • 6
    @NuclearWang This might be a US-specific thing that I'm not aware of (I am UK based) but why would the buyer have to pay extra if an appraisal comes in above the purchase price? Here, the appraisal (we call it valuation) is a private matter between the bank and the buyer and has no relationship to the purchase price (which is the price you actually pay).
    – JBentley
    Commented Sep 10, 2019 at 13:55
  • 9
    @Lawrence The scenario JBentley is describing is when the house appraises for less than the agreed sale price Seller agrees to 500k. Buyer has 100k down payment. Buyer needs to pay 500k through downpayment + loan. If appraisal = 500k, and bank loans up to 400k. 400k+100k = 500k-> Sale is successful. If appraisal = 480k, and bank loans up to 384k. 384k + 100k = 484k. 484k is less than 500k. Sale falls through because buyer can't borrow enough.
    – Mr.Mindor
    Commented Sep 10, 2019 at 18:37
  • 2
    Note that in the US, the seller normally doesn't get an appraisal because it costs a non-trivial amount of money and the appraisal must be absolutely impartial. So the seller tries to price their house appropriately but it's easy to be a few percent off, and that can and does make low-down-payment-buyers drop out.
    – JPhi1618
    Commented Sep 10, 2019 at 19:12
  • 4
    @JPhi1618 Additionally, a valuer will tend to be conservative because they are protecting the bank and their own liability, whereas a seller is trying to achieve the highest possible price, so it is not uncommon for the appraisal to be lower than the selling price.
    – JBentley
    Commented Sep 10, 2019 at 19:40
10

A personal story, previously shared in an answer to another question:

For the last house I sold, the buyer was doing a no-money-down mortgage and had no money for a down payment. He was even borrowing the closing costs. We accepted the offer, but when the bank did the appraisal, it was short of the purchase price. For most home sales, this would not be a problem, as long as the appraisal was more than the amount borrowed. But in this case, because the amount borrowed was more than the appraisal, the bank had a problem. The deal was at risk, and in order to continue either the buyer had to find some money somewhere (which he couldn't), or we had to lower the price to save the deal. Certainly, accepting the offer from a buyer with no cash to bring to the table was a risk.

In our case, we got lucky. I found some errors that were made in the appraisal, got it redone, and the buyer was able to borrow all that he needed for the house at the previously agreed-upon price.

Despite pre-approval, there are many situations that can arise between the offer and the closing that will affect how much money will be needed at closing. A situation that ordinarily might not jeopardize the sale for a buyer that has a good down payment could unfortunately make the deal collapse if the buyer has little to no cash of their own to bring to the table.

Improve this answer
8

Because, ultimately, the seller is likely going to have multiple offers for the house and will have to decide which to go with. In that situation, one of the most important weighing factors is: how likely is the seller going to manage to get to the finish line? Because there's actually a really long time between when an offer gets accepted and when the house is actually officially sold - usually between 1-2 months.

So, now, put yourself in the seller's shoes. You do not want to accept an offer that ends up falling through. You lose the time it takes for the deal to go bad. You lose the time it takes to get the house back on the market. You lose the time it takes to get more offers on it. And all this time you're losing? You're making house payments - house payments you wouldn't have to make if you accepted an offer that went the distance.

That's why sellers care about the downpayment. If there was an easy way to get your credit score and W2s, they'd want those, too. Not because they care, but because they want as much safety as they can get that the offer they're choosing will be finalized. If they have one offer from a fresh college grad with no credit and a 5% downpayment... and another slightly lower offer from a middle-aged couple with immaculate credit and 25% downpayment? They're accepting the second in a heart-beat - yeah, they might get more from the former, but they risk several house payments if the deal falls through.

Improve this answer
8
  • 2
    Agreed for the most part, except that "house payments you wouldn't have to make" is only true for those who are downsizing their property/mortgage (including switching to rented property where the rent is lower than the mortgage interest). Otherwise, you are simply swapping one house payment for another (which could even be higher if they are upsizing). For the the average transaction, the house payments are not the big issue, but rather the other factors you mentioned are the driving force.
    – JBentley
    Commented Sep 10, 2019 at 13:58
  • 5
    @JBentley Uh, no - and I've got firsthand experience with that. When we moved 16 months ago, we bought our new house first. After all, the real estate market was hot at the time: better to take our time to find a good home and manage to beat out any other purchasers, and then sell our old home afterwards. We already had to go 2 months where we made mortgage payments on both homes. If the sale of our house fell through, we'd be making another 1-3 months of payments on both homes.
    – Kevin
    Commented Sep 10, 2019 at 15:47
  • 2
    Ok, you are right, I should have included that in my list of cases it applies to. But it doesn't change my point, which is that this is only a concern in specific circumstances. I'm not familiar with the USA market but in the UK market the most common type of transaction is a "chain" where A sells to B and buys from C simultaneously, and the payments cascade. Most people cannot afford to do what you did (as it requires having capital for two properties), so it is not as common.
    – JBentley
    Commented Sep 10, 2019 at 16:20
  • 1
    To tell the truth, a lot of "sell first or buy first" depends on the market. I mean, if you're in a hot market, you almost have to buy first. Because it'll take awhile to find an acceptable house where your offer will be accepted. (When we did this, the housing market was so hot, that we had two people that looked at our house the same day it was first listed.) In a hot market, you're not worried too much about being able to sell your current home. But in a cold market? Selling your home is the hard part - so you generally sell first, and then find a new place.
    – Kevin
    Commented Sep 10, 2019 at 17:47
  • 1
    we made mortgage payments on both homes it's worth pointing out that the only true loss from doing that is the interest portion of the payment, since you will recoup the principal via increased equity once the house actually does sell. So it's really more of a monthly cash flow problem then an actual "loss" problem.
    – dwizum
    Commented Sep 10, 2019 at 20:12
1

Here are some reasons sellers might care about the down payment amount:

  1. Bigger isn't always better, but generally, as the size of the down payment goes towards $0, the likelihood of the deal falling apart due to financing problems increases. There is probably a point of diminishing returns though, say around 5% or $10k (whichever is greater), after which point it probably doesn't make much difference; e.g. someone with bank approval putting down $20k on a $300K house isn't that much more likely to fall through than someone putting down $150k on that house. If a seller asks for this reason, it could be just to identify low down payment amounts as a possible risk.
  2. Some sellers care about the future of their home, especially if they built it and are the original owners. They may want to make sure their home is maintained and cared for far into the future. The larger a down payment, the lower the monthly payment, which means the less chances of foreclosure down the line.
  3. Similar to #2, some sellers are good friends with their neighbors, and may remain friends with their neighbors even after they move. They may want to make sure their neighbors get a new good neighbor. Maybe there's a correlation between a larger down payment and having more cash to buy nice toys. Surely Mr. Big-Down-Payment who is obviously well-to-do and has a shiny new snowblower will be happy to let their neighbors borrow it!

Ultimately though, the down payment amount (above a certain threshold) really shouldn't matter, and for the most part probably doesn't matter nearly as much as purchase price/concessions, and an overall "good vibe".

Improve this answer
1

The other answers have focused on the likelihood of a sale falling through, but I think there is another side to this.

Given two otherwise identical buyers, if both can borrow the same amount of money, the one with the larger deposit can potentially afford to pay more for the property. Knowing the size of the buyer's deposit is to the seller's advantage if they want to make a counter-offer, as it gives them a better idea of what the buyer can afford.

Improve this answer
4
  • 1
    the one with the larger deposit can afford to borrow more money and thus pay more for the property - do you have a way to justify that? I'm not certain I've seen any strong evidence that there is a correlation between down payment amount and borrowing capacity.
    – dwizum
    Commented Sep 11, 2019 at 16:33
  • @dwizum You're right, and I've rephrased. I think there's still a point here though.
    – user3490
    Commented Sep 11, 2019 at 16:36
  • 1
    Sorry to be nit picky, but although what you're saying is true, the seller won't know that the two buyers are "identical" or can borrow the same amount - the seller doesn't know how much the potential buyers have been approved for. All they know is, buyer A offered $180k on loan and $20k down. Buyer B offered $190k on loan and $10k down. They don't have any idea what maximum amount A or B have been approved for. For all they know, A was approved for $900k, and B was only approved for $200k. Or vice-versa. There's nothing in the offer which indicates who has more borrowing capacity.
    – dwizum
    Commented Sep 11, 2019 at 16:44
  • 1
    One significant limiting factor for borrowing capacity is the loan-to-value ratio. If both buyers are up against this limit then the one with the larger deposit will be able to afford to pay more.
    – user3490
    Commented Sep 11, 2019 at 16:50

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .