Even with lending standards tightening up following the financial crisis, there are still a number of no-down payment and low-down payment loan options for qualified buyers. Unfortunately, some sellers and their Realtors are making the mistake of pushing away these buyers by demanding a higher down payment than is truly necessary.
There seems to be some confusion on the part of these sellers and their agents as to what qualifies a buyer to get a loan, and whether that no-down payment buyer will be a good person to sell to. In many cases, a buyer with a twenty percent or more down payment is no more likely to get a loan than a no or low down payment borrower.
Don’t make the mistake of brushing aside a qualified buyer by demanding too high a down payment when selling your home! Unless you have multiple offers on the table and can pick and choose the best deal, a low down payment borrower can be just fine.
A small down payment doesn’t mean the buyer is not qualified!
Money Is Money – Whether From A Lender Or A Buyer
Some sellers – perhaps at the encouragement of their listing brokers – are asking for buyers to deliver a larger deposit or down payment than they need to. Sellers and their agents are free to ask for what they like for a home, and it makes sense to verify that a potential buyer has the ability to pay for the home. But these special buyers are receiving pre-approval for a loan from a major lender, which means that the money is good – it is just coming from the lender as opposed to the buyer.
Getting a low-down payment or no-down payment loan today requires all the same steps as getting the average loan and in many cases even more documentation. The individual applying must meet strict criteria to qualify. He or she must provide tax returns, financial statements and proof of income. The lender goes over all the buyer’s information to verify that the applicant has the means to pay back the loan.
Only then do they offer a mortgage pre-approval. Just be sure what you are receiving is actually a pre-approval and not a pre-qualification. There is a huge difference between these two types of mortgage letters. Unfortunately many real estate agents do not know the difference and submit offers with the far less desirable pre-qualification. When I am representing a client selling their home and receive a pre-qual letter the agent is asked to supply a pre-approval instead. It is only after this letter is received that we will accept an offer.
It is also worth remembering that many of these low to no down payment specialized loans come from some of the largest organizations in the country, and are backed by the federal government. Unless the country as a whole becomes completely insolvent, the chance of the backer of the loan not being able to pay in full is highly unlikely. This is why banks across the country are more than happy to work with these specialized loans.
To turn away a buyer that uses one of these loans does not make much sense when you understand that the lender is legitimate, and that it has done all the due diligence to ascertain the risk of the loan. There is very little risk to the seller. When the transaction has closed and the lender sends the full payment for the home to the seller, it works exactly as it would with a traditional loan as far as the seller is concerned.
Sometimes the reason a borrower chooses to go with one of these programs is because they provide one of the best ways to get a lower mortgage interest rate. This can certainly be attractive to a buyer who plans on staying in the home for an extended period of time.
Understanding Loans That Are Low Or No Down Payment
There are several options for obtaining a low or no-down payment loan, including FHA loans, VA loans and USDA loans. To qualify for any of these loans you must meet certain criteria.
FHA loans are a low-down payment loans that allow the buyer to purchase a home with 3.5% or more as a down payment. FHA loans have slightly different credit requirements than standard home loans, but none the less criteria that is not that easy to meet if you are not worthy of a loan. Applicants must meet a certain debt-to-income ratio and they still must be able to pay back the loan. FHA mortgages are quite common and make up a large percentage of the type of financing borrowers choose when purchasing a home.
VA loans are backed by the federal government. Those that qualify do not have to come up with a down payment if they do not want to. The loans are so generous because the qualifications for getting them include military service. The type of loan an applicant can get will depend on a number of factors, such as how many years were served and the type of discharge the service member received. You can see all the benefits of a VA loan and the qualifications behind getting one. Often times those who are using VA loan financing will be doing so for the ability to finance 100 percent of the purchase.
USDA loans are designed to help low to middle income families buy properties in rural areas. These loans come through a partnership with the USDA and area lenders to give applicants full financing, requiring no down payment or only a low down payment. You learn all about this type of loan program by reading the common facts about USDA loans. This is a fantastic program for those who have no saved anything for a down payment but are otherwise qualified and ready to buy a home.
Buyers Should Be Aware Of What These Loans Do Not Cover
If you are a buyer that is fortunate enough to qualify for one of these loans, you should be aware that even 100% financing does not pay for all the costs of buying a home. There are closing costs to consider, as well as the cost of your inspection and appraisal. You have the option of requesting that the seller give you a closing cost credit, but not all sellers will be eager to do this. When preparing your offer and asking for a closing cost credit, keep in mind the seller is going to be concerned about their bottom line.
Any closing cost credit you are asking for is being deducted from their net proceeds. So while you think your offer amount may be fair if the closing cost credit is exorbitant, the seller will think otherwise. In some situations the benefits of closing cost credits to both buyers and and sellers are not explained well by their agent. In this circumstance you may have to come up with the closing costs on your own without seller assistance.
As a buyer, you can also expect the seller to request a deposit for earnest money. The deposit can range from 2% to 5%, which can be a considerable sum if you are not prepared for it. You may be able to get your Realtor to help you determine how to structure the transaction where your deposit comes back to you as a credit at the closing. But again, you will need to get the seller to agree to this. Not all sellers will.
Why Some Choose Low Down Payments
Sometimes a buyer will put down a small amount of money when purchasing a home and it has absolutely nothing to do with the common reason of “that’s all they have”.
There are many occasions where a very well qualified buyer will still own their existing property and will be buying another home. When buying and selling at the same time borrowers will often try to purchase with a low down payment before selling their current home. They do this because much of their equity is tied up in their current home. In this circumstance they will typically refinance once their home is sold, often times at that point putting twenty percent down to avoid the cost of private mortgage insurance. Obviously if a buyer can afford to own two homes at the same time they are more than qualified!
Additionally, there is also a certain segment of the market who believe that when money is cheap it makes far more sense to have a large mortgage. Instead of putting extra money down, they use these same funds in investments that can make them money instead of being tied up in a mortgage. Many of these people are overqualified to buy your home. They choose to take their money and invest it in the stock market or other financial vehicles.
Lets also not forget about the mortgage interest tax deduction. Those who are financially savvy also recognize there can be tax benefits to having a larger mortgage. This tax deduction can be used to bring their totally yearly tax bill down.
These are just three examples why you can’t assume that a small down payment means the buyer is not well qualified. Your real estate agent should always attempt to verify the reasons behind why a certain amount of money is put down on the sale. Only then will you have a good picture of the borrower and decide accordingly how to handle things.
The Earnest Money Deposit
For a seller the earnest money deposit should actually be a bigger concern when dealing with a low or no down payment borrower and not their ability to get the loan. The earnest money is what keeps a buyer honest during a real estate transaction. This is the money that a seller will keep if a buyer does not perform under the terms of the contract. Lets say for example you have your home on the market for $300,000. In many places a common earnest money deposit would be 5% of the purchase price or $15,000. This would obviously be a pretty hefty some of money for a buyer to lose.
With a no down payment borrower you will often see a token dollar amount put down. Many times it is just a couple thousand dollars. Doing some quick math you can see there is a huge difference between putting five percent down and only a few thousand dollars. The whole point of getting earnest money from a buyer is to prevent them from easily walking away from the transaction. When you are dealing with a low down payment borrower the likelihood of this happening increases.
This is where you and your real estate agent will need to figure out whether accepting the offer is worth the risk or not. In most instances you are not talking about having your home off the market all that long. Recently I was selling a home in Mendon Massachusetts where the buyer was getting a USDA loan. The down payment was only two thousand dollars. The seller, rightfully so had concerns about accepting the offer with such a low deposit. In the end we decided to run with it because the buyer wanted a quick closing.
In the end, when you put your house on the market, you are there to sell. You want someone to pay you for your house so you can move on from it. Whether the money comes from gold bars out of someone’s cellar, or a check from a specialized loan, you can still get the same outcome from the sale. Sellers and listing agents should remember this when they consider who much they will demand from buyers.
If there are not multiple offers on the table, never discount the fact that a buyer with a low down payment could be just as attractive as a buyer who has more to put down. Look over all of the terms in the offer. Never assume that a buyer choosing to put less money down is your worst choice. Make sure you have your real estate agent do all the necessary due diligence to choose the right offer.
Additional Helpful Financing Articles
- When and why you should get pre-approved for a mortgage via Rochester Real Estate Blog.
- Why down payments are getting smaller via The Wall Street Journal.
- Best home selling advice from multiple real estate authors via Sell My Home in Metrowest Massachusetts.
Use these additional financing articles to educate yourself on the home buying and selling process. A well educated client will more than likely find themselves avoiding any of the hiccups that can occur in a real estate transaction.
About the author: The above Real Estate information on a small down payment doesn’t mean the buyer is not qualified was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 28+ Years.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.