Understanding mortgage financing.

Understanding how a mortgage can affect your offer.

Most buyers do not have enough cash available to buy a
home, so they need to obtain a mortgage to finance the
purchase. Since you will probably make your purchase
contingent upon obtaining a mortgage, the seller has the
right to be informed of your financing plans in order to
evaluate them. That is one of the major reasons that
financing details are included in your offer.

Down Payment

As part of your offer, you will need to disclose the size of your
down payment. Once again, this allows the seller to evaluate
your likelihood of obtaining a home loan. It is easier to get
approved for a mortgage when you make a larger down
payment. The underwriting guidelines are less strict.

Interest Rate

Another reason for including financing information in your
offer is to protect yourself. If interest rates suddenly become
volatile and rise quickly, as sometimes happens, you may be
looking at a mortgage payment much higher than you
anticipated. By putting a maximum acceptable interest rate in
the offer, you are protecting yourself from such an
occurrence.

At the same time, the seller will probably want to see that you
have some flexibility in the financing terms you are willing to
accept. If interest rates are currently at eight percent and you
indicate this is the highest rate you will accept, you would be
able to cancel the contract without penalty if interest rates
rose past that point. The seller would suffer because they
have lost valuable marketing time and may have made their
own plans based on successfully closing the transaction.

Asking for Closing Costs and Financing Incentives

There may be times when, as part of your offer, you request
the seller to pay all or a portion of your closing costs, or
provide some other financial incentive. One common request
is asking the seller to provide funds to temporarily buy down
your interest rate for the first year or two. Such incentives can
be especially effective if a buyer is tight on money or pushing
their qualifying ratios to the limit.

Whenever you ask for incentives such as these, you will
probably find the seller less willing to negotiate on price. After
all, what you are really asking for is have the seller to give you
some money to help you buy their house. The end result is
that, for a little relief in the beginning, you are willing to pay a
little more in the long run.

Seller Financing

Another occasional request is to have the seller "carry back"
a second mortgage to help facilitate your purchase of their
home. In cases when the seller does not need all the
proceeds from their sale in order to purchase their next
home, this is an option. The advantage to the buyer is that by
combining your down payment and the second mortgage
from the seller, you may be able to avoid paying mortgage
insurance and save yourself some money.

If such a carry-back is part of your offer, you should include
the terms you wish to pay on such a second mortgage. Keep
in mind that your first trust deed lender needs to know this
information so they can underwrite your loan, and they have
certain minimum requirements. The minimum term of the
second mortgage can be five years. The minimum payment
can be "interest only." Longer mortgage terms and payments
that also include principle are also acceptable.

Cash Offers

If you are one of those rare individuals making a cash offer to
buy a home, it makes sense to provide some documentation
with your offer that shows you have the funds available. A
bank statement would be fine. If you have to liquidate stock or
some other asset, your offer should give a timetable on when
you will provide proof you have converted the asset to cash.

Other Financing Details in Your Offer

Your offer should also contain information on whether you
are obtaining a fixed rate or an adjustable rate mortgage. It
should also state whether you are obtaining conventional
financing or obtaining a VA or FHA loan.