Originally posted May 2018; edited March 2024
I’m often asked why the seller cares how much of a down payment a buyer uses. “Don’t they get the same amount of money either way?” Actually, sellers could care less about how much down payment a buyer uses.
What sellers DO care about is what the buyer’s mortgage contingency clause looks like in an offer. I like to think of contingency clauses as “But-Not-If” clauses, because that’s effectively what they are. In other words, a common offer with inspection and mortgage contingencies basically reads like this: I agree to buy your house for $XX, But-Not-If I don’t like the inspection results, And-Not-If I can’t get a mortgage for XX% of the home’s value. Sellers would much rather sign a contract that simply says “I agree to buy your house for $XX.”
Hopefully you can see where I’m going with this!
There are different variations of But-Not-If clauses which vary in how much they protect the buyer’s ability to back out of the transaction. In the case of a mortgage But-Not-If, there’s a big difference between one that says a buyer needs to get approved for 97% of a home’s value and one that says only 70% of the home’s value is needed. Buyers using a 97% mortgage are also assumed to be doing so because they don’t have the extra cash handy to use as a down payment. If a buyer is using every last penny to barely be able to put down three percent and pay for closing costs, almost any unexpected financial hiccup could make them become unqualified for their mortgage (or any mortgage). The But-Not-If clause in their offer would allow them to back out of the home purchase without penalty if that happened, which is why sellers are wary of their offer in the first place. If a buyer writes a But-Not-If clause that only requires 70% of the home’s value on the other hand (30% down payment), that buyer is also demonstrating that they have a more substantial pile of cash at their disposal to deal with any unexpected financial hiccups. That buyer is more likely to be able to weather a perfect storm of unexpected hospital bills, a dip in their income due to time out of work, interest rates rising sharply, etc. and still be able to purchase the home. The second buyer’s But-Not-If clause still says that the buyer can back out if they can’t get approved for a 70% loan, but the seller knows that the 70% mortgage buyer is probably also able to use some of the money they were planning to use fort the down payment to fix a financial hiccup or two and still get a mortgage for the home. This is also why, in a multiple offer situation, I often suggest showing the seller a pre-approval letter with an amount higher than the offered price as a way to demonstrate the buyer’s ability to weather a financial setback during the process. 🏠