Active Rain December 16, 2009

Terms: Down Payment

Terms are often overlooked because people are so preoccupied with price in this economy. However, they are, in many cases, just as important as price. I often have buyers question what difference the size of their down payment makes to the seller, since the money is just as green if it comes from the lender is it did their bank account. In a zero sum world, this is true. But context is important, and there is an immutable law that cannot be avoided:

Guarantees cost money. Certainty costs money. 

If you are going to put 20% or more down on a house, your lender will not require you to pay for mortgage insurance (PMI). If you put less than 20% down, PMI is required. PMI hedges the bank’s bet that the loan will perform. But it is more than that- the bigger the down payment, the more likely the loan will get approved. The reason for this is simple: the less value of the home is borrowed, the more likely the borrower will repay. Therefore, a low LTV (Loan to Value) is attractive to loan underwriters. The lower the LTV, the lower the risk. 

So the size of the down payment will determine the peace of mind of the seller and their confidence that they are dealing with a qualified buyer. The ultimate down payment is 100% down. From there certainty erodes. So if you are buying a home in Westchester or the surrounding counties with 3.5% down, you ought not balk if the seller is concerned. Selling a home is tough these days, and it would be tragic to have a house off the market under contract for 60 days only to have the deal fall through. Big down down payment deals seldom fall through. 

I am a big fan of FHA mortgages, not because they are common in Westchester, but because I did dozens of them in Rochester. However, until recently, FHA mortgages in Westchester County were as rare as hens teeth because the FHA loan limit was so low there were few Westchester homes that were eligible. With the changes to FHA loan limits and the fall of prices, they have become common, but agents and sellers alike are still not yet used to them. I have seen sellers take a deal 5 or 10 thousand less because of the larger down payment. Again, certainty costs money. So if you are going FHA on a Westchester County home, keep that in mind when you are formulating your offer. Terms matter, and down payment is a big factor. 

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