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I'm a first time home buyer, buying in the Jersey City area. My realtor insists that, given two similar offers, the one with a higher down payment is viewed as a stronger offer. My realtor even said that some buyers would accept a lower offer if it had a higher down payment.

I find this exceptionally hard to believe, especially the part about accepting a lower offer. Is there any truth to this? My realtor couldn't come up with an explanation, only suggesting that I put in a high down payment if I really like a place. What is it about a higher down payment that sellers might see as appealing?

Why are sellers even privy to my financing details? Do they get to see my closing costs and interest rate, too?

Update: Assume I am pre-approved for a conventional loan

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    Are you already pre-qualified for a loan? If so, the down payment should really have no bearing on your viability as a buyer. – Michael Richardson Mar 28 '17 at 16:11
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    If you are trying to make a stronger offer I would put more earnest money down before I increased the down payment. – JaredStroeb Mar 28 '17 at 20:35
  • @JaredStroeb - not sure about NJ, but your earnest money is fixed in most places, to the best of my knowledge – warren Mar 30 '17 at 17:45
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    @warren I had never heard of a fixed earnest money payment until I googled it just now, turns out States set their own legal limits to the amount of earnest monies allowed. Most of the internet said 1-3% was common. – JaredStroeb Mar 30 '17 at 17:57
  • @JaredStroeb - I knew it varied, but it's $1k in Kentucky – warren Mar 30 '17 at 18:00
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There is some element of truth to what your realtor said.

The seller takes the house off the market after the offer is accepted but the contract is contingent upon, among other things, buyer securing the financing. A lower down payment can mean a higher chance of failing that. The buyer might be going through FHA, VA or other programs that have additional restrictions. If the buyer fails to secure a financing, that's weeks and months lost to the seller.

In a seller's market, this can be an important factor in how your bid is perceived by the seller. Sometimes it even helps to disclose your credit score, for the same reason.

Of course for your situation you will have to assess whether this is the case. Certainly do not let your realtor push you around to do things you are not comfortable with.

Edit:

  1. A higher down payment also helps in the situation where the house appraisal does not fare well.

  2. As @Dilip Sarwate has pointed out, the particular area you are interested in is probably a seller's market, thus giving sellers more leverage in picking bids. All else equal, if you are the seller with multiple offers coming in at similar price level, would you pick the one with 20% down or 5% down?

  3. While it is true that realtors have their own motives to push through a deal as quickly as possible, the sellers can also be in the same boat. One less mortgage payment is not trivial to many.

It's a complicated issue, as every party involved have different interests. Again, do your own due diligence, be educated, and make informed decisions.

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    The realtor just cares[1] about getting his cash the fastest possible. He is even willing to take home less cash if he can close faster. Though controversial, the freakonomics article about realtors come to mind (and Joe has posted it in another answer). So never let a realtor push you around. He is there to do a service to you. [1]: Some (few?) realtors do think that getting you a good deal is a big plus. – Mindwin Mar 28 '17 at 14:50
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    @Mindwin - exactly. I am a Realtor as well. I rejected, after consulting my seller, multiple offers for $280-$300K. Much to the chagrin of her son. The home sold for $335K, $5K above asking. The 2 extra months cost her a bit in utilities and taxes, but the extra $30K+ made it worth it. The rejected offers included 100% cash. And the agents I rejected tried to push "cash" as valuable. Either way, my client has cash in her bank account now. – JoeTaxpayer Mar 28 '17 at 17:04
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    "All else equal, if you are the seller with multiple offers coming in at similar price level, would you pick the one with 20% down or 5% down?" Why do you think the seller even knows what the buyer's downpayment will be? The mortgage terms are entirely between the buyer and their lender. My wife and I even changed our downpayment during the escrow period. – Kevin Mar 28 '17 at 23:45
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    And what prevents the buyer from lying? – Kevin Mar 29 '17 at 0:25
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    @Kevin IANAL but if the buyer makes an offer in bad faith I believe the seller is free from the contract and may take other offers even if the financing is secured on time. – JimmyJames Mar 29 '17 at 13:25
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First, let me say that you have to take everything your agent says with a grain of salt. Freakonomics had a great article that discussed the math behind the motivation of the real estate agent.

It described the home seller, trying to get, say $400K. On a 6% commission, the $24K is destined to be split between seller realtor office and buyer's realtor's office. The selling agent gets $6,000 (or so) in the end. As a seller, if I settle for $380K, my realtor is only out $300, netting $5700. But $20K lower sale price, and I just lost nearly $19K after commission is paid.

The agent would have the natural goal of volume, not extracting the last dollar from the buyer. Gaining back the last $20K to the seller will cost the realtor far more than $300 in her time, keeping the house on the market and waiting for the better offer.

Sellers might use down payment as one way to estimate the probability of the financing falling through, but it's a rough estimate at best because, in the case of bank financing, the bank needs the same time to run through the paperwork for a 3% down or a 20% down. It's just as easy for the buyer to qualify or not qualify for one loan or the other. There are young couples with great incomes and no debt, who blow away the required ratios for proposed debt to income, but haven't saved up the otherwise huge 20% downpayment. Then there are those who have saved for years, even having 30% to put down, but their income is still not going to qualify them.

The offer will be contingent on the financing, regardless. It will show that you are putting $XX dollars as a downpayment, and the final transaction is contingent on your bank approving you.

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    I'm not sure how the first two paragraphs are relevant to the question? – DJClayworth Mar 28 '17 at 14:04
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    It sets the stage for the realtors motivation for the buyer to be able to close more quickly even though her premise is incorrect. – JoeTaxpayer Mar 28 '17 at 14:05
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    The question is about two simultaneous offers, one with a lower sale price but a larger downpayment and the other with a higher sale price but smaller downpayment. So, there is no question of keeping the house on the market longer and waiting for the latter while rejecting the former out of hand. – Dilip Sarwate Mar 28 '17 at 14:23
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    The realtor is pressuring her client to put more money down, even though his offer is higher. Her reasoning is faulty. The selling realtor wants a fast sale, but has a sale regardless. – JoeTaxpayer Mar 28 '17 at 14:53
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    This doesn't answer the OP's question. There are hints of an answer (though more of the unasked question vs. the asked question) but it's not spelled out. Also, it's not even accurate to say the paperwork will be the same; surely there's at least one additional form for the PMI that would be required for a 3% down loan vs. a 20% down loan that wouldn't need PMI. – stannius Mar 28 '17 at 15:51
13

There is considerable truth to what your realtor said about the Jersey City NJ housing market these days. It is a "hot" area with lots of expensive condos being bought up by people working on Wall Street in NYC (very easy commute by train, etc) and in many cases, the offers to purchase can exceed the asking price significantly. Be that as is may, the issue with accepting a higher offer but smaller downpayment is that when the buyer's lender appraises the property, the valuation might come in lower and the buyer may have to come up with the difference, or be required to accept a higher interest rate, or be refused the loan altogether if the lender estimates that the buyer is likely to default on the loan because his credit-worthiness is inadequate to support the monthly payments. So, the sale might fall through.

Suppose that the property is offered for sale at $500K, and consider two bids, one for $480K with 30% downpayment ($144K) and another for $500K with 20% downpayment ($100K). If the property appraises for $450K, say, and the lender is not willing to lend more than 80% of that ($360K), then Buyer #1 is OK; it is only necessary to borrow $480K - $144K = $336K, while Buyer #2 needs to come up with another $40K of downpayment to be able to get the loan, or might be asked to pay a higher interest rate since the lender will be lending more than 80% of the appraised value, etc. Of course, Buyer #2's lender might be using a different appraiser whose valuation might be higher etc, but appraisals usually are within the same ballpark. Furthermore, good seller's agents can make good estimates of what the appraisal is likely to be, and if the asking price is larger than the agent's estimate of appraised value, then it might be to the advantage of the selling agent to recommend accepting the lower offer with higher downpayment over the higher offer with smaller downpayment. The sale is more likely to go through, and an almost sure 6% of $480K (3% if there is a buyer's agent involved) in hand in 30 days time is worth more than a good chance of nothing at the end of 15 days when the mortgage is declined, during which the house has been off the market on the grounds that the sale is pending.

If you really like a house, you need to decide what you are willing to pay for it and tailor your offer accordingly, keeping in mind what your buyer's agent is recommending as the offer amount (the higher the price, the more the agent's commission), how much money you can afford to put down as a downpayment (don't forget closing costs, including points that might be need to be paid), and what your pre-approval letter says about how much mortgage you can afford. If you are Buyer #1, have a pre-approval letter for $360K, and have enough savings for a downpayment of up to $150K, and if you (or your spouse!) really, really, like the place and cannot imagine living in any other place, then you could offer $500K with 30% down (and blow the other offer out of the water). You could even offer more than $500K if you want. But, this is a personal decision.

What your realtor said is perfectly true in the sense that for Y > Z, an offer at $X with $Y down is better than an offer at $X with $Z down. It is to a certain extent true that for W > X, a seller would find an offer at $X with $Y down to be more attractive that an offer at $W with $Z$ down, but that depends on what the appraisal is likely to be, and the seller's agent's recommendations.

0

There is a lot of your financial information that the selling agent handles in the course of a real estate transaction, including but not limited to your pre-approval letter which states what maximum purchase price might be. Closing costs and interest rate are not details they would know unless you shared that with them, given that that is done after you go binding.

I agree with xiaomy in that, while in absolute monetary terms the higher amount should always be more attractive, the selling agent wants to ensure the transaction goes as smoothly as possible. With contracts falling through due to first-time buyers not making it through mortgage underwriting, it is in the seller's interest - and thus the seller's agent's concern - that the buyer not present such hurdles. Insofar as a higher down payment is a signal for that, then I can understand why it would be more attractive.

protected by Chris W. Rea Aug 5 '18 at 3:53

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