Does a low down payment make your offer weaker?

Low down payment: “I don’t get no respect!”

Mention a low down payment and a great oddity arises: Homebuyers love them, sellers aren’t so sure, and lenders are traditionally cautious. These reactions are baked into the real estate marketplace.

Low down payment options you'e never heard of

Today, however, buying with little cash up front is increasingly accepted.

Low down payment is the norm today

According to a study of 2016 buyers by the National Association of Realtors (NAR), most borrowers purchase with little cash up front. On average, it’s just six percent down for first-time buyers and 14 percent up-front for repeat buyers.

The lowdown on down payment assistance (DPA) programs

The majority of buyers make smaller down payments, and the marketplace is increasingly accepting the idea. Freddie Mac now has its Home Possible ® Advantage plan, which requires just three percent down. Fannie Mae offers a similar requirement for its HomeReady® program.

Traditionally, of course, FHA loans have been available with 3.5 percent down, VA financing requires no money up front, and borrowers who finance with conventional loans backed by private mortgage insurance need 5 percent down.

Little risk for lenders

The logic behind these programs – and the reason more loan options with little down are appearing – is that the data show there’s little additional risk to lenders when borrowers finance with smaller down payments.

Research from the Urban Institute found that defaults for loans with three percent to five percent down were “only slightly higher“ than financing with five percent to 10 percent down.

Fannie Mae conventional mortgage allows just three percent down

No less interesting, when borrowers had high credit scores and bought with three percent to five percent down, their default rate was lower than financing with five percent and 10 percent up front.

But if loans with little down are okay with lenders, what about home sellers? If they get an offer with a low down payment will they turn up their noses?

Low down payment offers

It’s not surprising to think that sellers want the best price and terms for their properties. Given the right price and an all-cash offer, property owners will be jubilant. With an all-cash offer, there are no worries about qualifying for loans, points, or endless paperwork requirements from the borrower.

It turns out that all-cash offers are fairly common. As NAR reports, “all-cash sales were 18 percent of transactions in June, down from 22 percent both in May and a year ago, and the lowest since June 2009 (13 percent).”

Surprising strategies to beat an all-cash offer

Given that roughly one home in five gets an all-cash offer, sellers might want to wait for a buyer with a thick wallet. The catch is that a lot of all-cash bids come from investors, a group not known for lofty offers.

If the goal is a higher price, the better option is often to find a buyer with financing, and this is where the issue of down payments arises.

The seller wants the sale to go through, and it seems logical that with more money down, a loan application will fly through the system. And sure, given two equally-qualified borrowers, more down is better for lenders because it means less risk.

The catch is that people are different because their incomes, credit scores, employment history, debts, and other factors vary. It’s possible to have a large down payment and be a weak mortgage applicant, while someone with little down who is diligent about paying bills might find easy lender acceptance.

Make your low down payment offer acceptable

What this means is that if you bid for a property with a low down payment, you likely will need “something more” to strengthen your position.

First, get pre-approved by a lender before you go house hunting. Not a skimpy pre-qualification, but a pre-approval. this means you’ll submit a mortgage application, supply income and asset documentation, and authorize a credit report.

Buying a house: How to deal with tough competition

Pre-approval letters differ. Make sure your lender provides one indicating that you are approved for financing. It should state that you can close as long as the property meets the lender’s guidelines. You might want the lender to indicate how it determined your ability to borrow. A custom letter is better than an obvious form letter with no detail.

Second, you or your broker needs to explain to the seller that at closing, the owner gets a check. The check amount from you will be the same regardless of how the property is financed and how much you put down.

While some sellers may be cautious when they see a purchase offer with little down, in today’s world, that may be all they see. Just remember that most purchasers – especially first timers – are now making low down payments and successfully buying houses.

What are today’s mortgage rates?

Current mortgage rates have not moved much recently. Rates are lower than they have been for months, making homes more affordable. However, property prices are on the move, so it might be good to buy sooner rather than later.