When competing against other buyers in a multiple offer situation, you need to come in with your strongest offer right up front. While price is definitely one of the biggest considerations, sellers will scrutinize every part of that offer, including the amount of your down payment.
Before we get into why that number matters, let’s set the stage by discussing down payment options. For years, 20 percent was the down payment benchmark, but those days are long gone. Today, qualified borrowers can purchase a home for as little as 3 percent down — or even no money down, in some cases.
Not only are there government-backed mortgage programs that accept low to no down payments, but conventional mortgage requirements have also eased up over the years. There are now several programs that require as little as 3 percent down, and some banks and mortgage companies offer niche products with an even lower down payment.
So, with all of the options available today, what difference does it make to a seller if you put down 3 percent or 10 percent? The difference is that buyers with low down payments are sometimes seen as riskier than those who put down more. Buyers with a 10-20 percent down payment will potentially have an easier time qualifying for a loan, and most likely, they will financially be better able to handle unforeseen inspection or appraisal issues.
“Financial strength is one of the contributing factors,” said REALTOR® Amy Jackson with Coldwell Banker Hubbell BriarWood. “When a buyer is utilizing a larger down payment, they appear more prepared to a seller. It shows they’ve been saving and that they are financially capable of handling any issues that may arise.”
Jackson says this thinking is especially common among sellers who aren’t familiar with the low down payment loan options available today.
“Not a lot of buyers can afford a 10 or 20 percent down payment, so these programs are being used more frequently,” she said. “But, a lot of them are also relatively new, and not all sellers see new as a good thing.”
Some borrowers use low down payment programs because they need to; 3.5 percent may be all they can afford. Others may choose these programs. Maybe they have enough in the bank to put down 10 percent, but doing so would wipe out their savings and they want to leave themselves a cushion.
Regardless of the reason, there are other ways to strengthen your offer and make a seller more comfortable with your down payment amount. For instance, you will automatically have an advantage if you use a local lender. Why? Because there tends to be more variability in the qualifying process and greater perceived risk with online or unknown lenders. When considering multiple offers, the buyer using a reputable area lender will typically have a better chance.
Using a local lender is also important because a strong relationship between your REALTOR® and mortgage company will be the key to a successful transaction. That relationship is much easier to maintain when the lender is local and accessible.
“If I’m working with a client who has a low down payment, I will often ask the lender to include additional information in the pre-approval letter that lays out my buyer’s other financial strengths,” said Jackson. “For instance, they may only be putting down 3.5 percent, but the lender can add that they have a high credit score and a good amount of savings in the bank.”
A higher earnest money deposit may also get a seller to look past a lower down payment. Often called a “good faith” deposit, an earnest money deposit — typically between 1-3 percent — is common in real estate transactions and shows a buyer is committed to purchasing a particular home.
“Again, this shows you have real skin in the game, that your intention is to see this through and you are backing it financially,” said Jackson.
Also, keep in mind there may be other important factors to a seller. For instance, when a buyer takes possession of a property is sometimes just as important as pricing or financing. One of the biggest concerns for sellers in this low-inventory market is finding their next property. If a buyer can offer them time, or a leaseback at no charge, it can set the offer apart.
The bottom line: seller hesitations around smaller down payments can be overcome. But, to give yourself the best advantage, you need to work with a competent and creative agent who will shape your offer to the desires and concerns of the seller.
“In this competitive market it’s our job to sell our buyers to the sellers,” said Jackson. “That’s why it’s important to work with an organized, professional REALTOR® who is doing all they can for you and presenting you as an A+ buyer, regardless of the size of your down payment.”
To ensure you are working with qualified professionals, visit the Greater Lansing Association of REALTORS® website at www.lansing-realestate.com for a list of area REALTORS® and lenders.
