More Money Down or More Financed?

Question

I am currently trying to buy a house outside Boston (absolutely brutal market) and my realtor just told me the more money I can put down on the property, the better my offer will look.

My question is, why would a seller care if their money is coming from a bank or the buyer's pocket?  As long as they get their money, does it matter?

Josh Starner · Answer

Hey Caleb,

Offers with more money down are typically preferred for a couple of reasons. First in the event the property does not appraise it indicates the buyer has additional funds they can use to cover an appraisal shortfall. For example, the buyer can lower their down payment on the property and use some of those funds to cover the gap in appraisal.  Another strategy is if this is a concern with a property you are bidding on, have your realtor put verbiage into the contract that you would cover an appraisal shortfall capped at a specific amount. For example, "My client is putting 20% down on this $500,000 property ($100,000), however in the event it under appraisals my client will cover the difference with additional funds capped at 5% ($25,000). This will show that if the property appraises  at $475,000 for example but you are buying at $500,000, you are telling the seller you have the additional funds (25K) and will pay them in order to ensure a smooth transaction regardless of appraisal should it be $475k or higher. This strategy has worked for my clients who want to ensure the seller(s) know they are well funded and serious but want to take advantage of low interest rates and preserve capital for renovations or personal safety nets.

Tom Wagner · Answer

I agree with others here: sellers see down payment percentage as a proxy for your ability to make it to the closing table. We could debate whether that is fair or true, and I would be curious to see a graph detailing how likely an offer is to close based on the down payment percentage (ex: buyers with 20% down successfully close X% of the time).

Tangentially, my friend @Andrew Freed shared in another thread that FHA buyers still represent a substantial portion of the market on multifamily properties, so if you hear someone say "It is impossible to buy with an FHA loan in this market!" that simply isn't true. It may be harder to compete and your FHA offer may not be considered in a 20-offer-situation on a single family, but you can still take down a property with an FHA loan even in this crazy market.

Josh Starner · Answer

From the seller's perspective it's all about managing risk. Getting three to four weeks into a transaction to have it fall apart due to lack of financing is a waste of time and can hurt the sale of the property in the future. Aside from the carrying costs associated with the time under contract and attorney review (if applicable), the other buyers may have moved onto another property. Additionally some may speculate that it was an inspection issue that caused the property to go back on market and choose another. Some buyers feel slighted their offer wasn't chosen and will not re-bid. These are risks that factor into a seller's mind when choosing the right offer to accept, especially with an investment property or a property that is not cash flowing, typically the seller will want a swift and easy closing. When individuals aren't putting much down, it can be seen as a risky offer for the seller to accept.  I might also suggest submitting proof of funds with your offer, speak to your agent in more detail but a low down payment coupled with a large proof of funds is another strategy I have used to overcome some seller skepticism on a low down payment offer.

Conner Olsen · Answer

A 10k difference in down payment at 4% interest comes out to $48/month. I'd rather have 10k in the bank.

Bud Gaffney · Answer

Financed! More $ in your pocket for down payment for NEXT property. Keep your cash for down payments!

Caleb Andrea · Answer

@Tom Wagner, this is a good post and makes a lot of sense. I’m in, what looks like a rare funding scenario in that area, with the VA loan.

Lien Vuong · Answer

Security for the seller and your ability to close on the loan.

Conner Olsen · Answer

@Caleb Andrea In my market seller's don't care if you are putting down 5% or 25%. I think the opportunity cost of tying up the money would be worse than putting extra down.

Theresa Harris · Answer

Guessing this is a house for your if you are trying to do 0% down.  Why not say that you are pre-approved for the amount in the offer?  You can also do a larger deposit with your offer (I think in the US you call it earnest money) and be a bit flexible with your closing date.

Caleb Andrea · Answer

Thank you very much @Josh Starner.

We are currently trying to put down as close to 0% down as we can for the same renovation and safety net reasons, and have also just started putting in verbiage saying we will cover a specific amount on the appraisal gap.  I just wasn't sure that putting more or less down after identifying a willingness to cover a certain appraisal gap would matter.

This is just a totally different market than the last time I bought a house so I am behind the curve on figuring out a good strategy and knowing how offers translate from realtor to seller.

More Money Down or More Financed?

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