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I'm going through the process of buying a home now. Whenever I make an offer, the seller wants to know how much of that will be down payment.

Why do they care? Isn't the combination of the down payment plus the bank's mortgage payment going to be equal to the full offer? Do the sellers get some advantage from more cash in the down payment?

Peter Mortensen
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David says Reinstate Monica
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6 Answers6

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They want to gauge the chance of a successful sale. There's nothing quite as frustrating when selling and moving to a new home as getting into escrow, doing all the paperwork, crossing off all the check lists, only to find out that your buyer didn't qualify for the loan and the mortgage fell through.

By asking about your down payment (20% or more is often the minimum to qualify for a mortgage), the seller will get a sense of how likely you are to be qualified as a buyer.

For example, if you get three offers on your house, all for the same price, and one buyer is financing 80%, one buyer will finance 50%, and one buyer will pay cash for the whole thing, which offer are you most likely to accept and why?

Rocky
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    This doesn't sound quite right to me. Any place I put offers on always ask for a pre-qualification letter up front and still want to know the down payment. If I'm pre-qualified enough doesn't that prove that the sale at least wont fail on the financing side? – David says Reinstate Monica Sep 10 '19 at 01:24
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    @DavidGrinberg - You can always tell the seller that you are pre-qualified and it is none of their business how much you are putting down. And, risk losing the house because someone else was more forthcoming. – Mattman944 Sep 10 '19 at 02:47
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    @Mattman944 I think I'm quite clearly not suggesting that at all. I think there is clearly more of a reason for sellers asking for this information than 'oh i'm just curious' and I'm trying to figure out what it is. – David says Reinstate Monica Sep 10 '19 at 02:59
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    @DavidGrinberg - A prequalification letter is no guarantee that the financing will come through. It'll come through if all your documentation proves everything the bank is assuming and doesn't reveal some other issues. While most of the time that will be true, it's certainly not 100%. Someone that is bringing a relatively large down payment to the table is much more likely to get through the underwriting process and to do so on time. Someone putting down a minimal down payment is much more likely to have problems turn up or to end up having financing delays. – Justin Cave Sep 10 '19 at 03:14
  • @JustinCave I'm familiar with pre-qualification vs pre-approval. That doesn't answer my question though. The down payment I report to the seller will not affect my chances of being approved, and if I don't get approved it doesn't matter for the seller what I reported. – David says Reinstate Monica Sep 10 '19 at 03:28
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    @DavidGrinberg - The down payment amount absolutely influences whether you will be approved and whether you'll be approved by the scheduled closing date. If you have the liquid assets to put down 20%, you have far more room to deal with issues the underwriter finds than someone that is trying to get a loan only putting down 3% half of which is coming as a gift from a parent. Unless you're saying that you tell the seller you're putting down 80% when you're really putting down 3%? – Justin Cave Sep 10 '19 at 03:36
  • @JustinCave The down payment is important for the bank. It has no clear bearing for the seller as they are not the ones assessing the mortgage risk. – David says Reinstate Monica Sep 10 '19 at 03:49
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    @DavidGrinberg - But they are assessing the risk. They're not doing a full underwrite, obviously. But they will absolutely look at the risk markers they can see. The down payment you're making is a strong indicator of your financing risk. As is the mortgage program you're using (i.e. FHA, VA, etc.), whether you have a pre-qualification letter, etc. – Justin Cave Sep 10 '19 at 04:14
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    @DavidGrinberg If the down payment is important for the bank, then by definition it is important for the seller. It doesn't matter that the seller is not the one assessing the risk - they are going to be affected by that risk assessment regardless of who carries it out, if the assessment results in a rejection. – JBentley Sep 10 '19 at 09:22
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    The seller doesn't literally care about the downpayment, they care about the chances that your mortgage will fall though. And asking about downpayment size is an "easy" and common thing to do, as an indicator of that. – dwizum Sep 10 '19 at 10:45
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    @DavidGrinberg The bank is assessing the risk of you not being able to pay the mortgage in order to decide whether to give you the loan, while the seller is assessing the risk of you not being able to get the mortgage to decide whether to take the house of the market to try to close a deal with you – yoozer8 Sep 10 '19 at 11:52
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    @Rocky The only thing I'd suggest changing in this great answer is the wording around 20% being the 'minimum' to qualify for a mortgage; in many jurisdictions 5% down payment will be the mandated minimum, but 20% is much better, and more likely to get approved, as you're indicating here. – Grade 'Eh' Bacon Sep 10 '19 at 13:13
  • @Mattman944 You should be careful though. Don't show the seller your "financial" hand - if he knows that you can afford more than your bid, it is easier to negotiate. – Stian Sep 10 '19 at 15:48
  • 20% isn't even close to the minimum. – THiebert Sep 10 '19 at 17:37
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    If we are going to get pedantic, then unless we name a specific mortgage product in a specific market, there's no point in even mentioning a "minimum" because there is no universal minimum. – dwizum Sep 10 '19 at 20:07
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    FYI, a seller might even accept a LOWER offer if the financing is secured if they are in a hurry to sell. – Antzi Sep 12 '19 at 00:18
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    @THiebert The answer says often the minimum. There is no universal minimum - that is dependent on the bank, the deals they are marketing, and the individual circumstances of the case. – JBentley Sep 12 '19 at 11:41
  • A bigger down payment results in a smaller loan, which results in a bigger change to get approved. – isaace Sep 12 '19 at 15:12
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If the appraisal is less than the purchase price and the down payment is small, the bank might not approve the mortgage.

Charles Fox
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    Wouldn't the seller know the approximate appraised value beforehand? Why would they still need to know the down payment amount? If the offer is too small/under the appraised value they can just reject it out of hand. Plus isn't the appraised value always a conservative estimate? If they are selling it for under the appraised value seems like something went very wrong – David says Reinstate Monica Sep 10 '19 at 01:25
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    @DavidGrinberg The keyword in your comment is "approximate". If the sale price is $500k and the bank's maximum LTV is 80% ($400k), and you have a 20% downpayment ($100k), and the appraisal comes in at $480k, then the bank's maximum loan is now 80% x 480k = $384k, and your $100k downpayment is not sufficient to meet the purchase price. If your downpayment had instead been $116k, then the lower appraisal would not be an issue. Hence from the seller's perspective, $116k (higher downpayment) is better than $100k (lower downpayment). – JBentley Sep 10 '19 at 09:15
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    @DavidGrinberg Also consider that LTV is not the only criterion that the bank is considering. They are looking at your overall underwriting risk. If their risk appetite is already stretched to the maximum because of a high LTV, and some other (relatively minor) credit risk comes to their attention during the application process, they are more likely to reject than if they are comfortably below the max LTV (and therefore much more likely to recover the full loan amount in the event of a foreclosure). – JBentley Sep 10 '19 at 09:19
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    @NuclearWang This might be a US-specific thing that I'm not aware of (I am UK based) but why would the buyer have to pay extra if an appraisal comes in above the purchase price? Here, the appraisal (we call it valuation) is a private matter between the bank and the buyer and has no relationship to the purchase price (which is the price you actually pay). – JBentley Sep 10 '19 at 13:55
  • @JBentley re: your first comment with numbers, I think that would make a great answer. – Notts90 Sep 10 '19 at 15:53
  • @JBentley If the appraisal comes in above the purchase price, that's fine. It is a private matter between the appraiser, bank, and buyer, not affecting the sale or seller, and the buyer just gets to believe they got a good deal. – WBT Sep 10 '19 at 16:10
  • @JBentley 480k-384k = 96k, which is less than 100k. (Since 480<500, 20% of 480 must be less than 20% of 500.) Why wouldn't the $100k downpayment (more than) cover the required $96k? – Lawrence Sep 10 '19 at 17:11
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    @Lawrence The scenario JBentley is describing is when the house appraises for less than the agreed sale price Seller agrees to 500k. Buyer has 100k down payment. Buyer needs to pay 500k through downpayment + loan. If appraisal = 500k, and bank loans up to 400k. 400k+100k = 500k-> Sale is successful. If appraisal = 480k, and bank loans up to 384k. 384k + 100k = 484k. 484k is less than 500k. Sale falls through because buyer can't borrow enough. – Mr.Mindor Sep 10 '19 at 18:37
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    Note that in the US, the seller normally doesn't get an appraisal because it costs a non-trivial amount of money and the appraisal must be absolutely impartial. So the seller tries to price their house appropriately but it's easy to be a few percent off, and that can and does make low-down-payment-buyers drop out. – JPhi1618 Sep 10 '19 at 19:12
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    @JPhi1618 Additionally, a valuer will tend to be conservative because they are protecting the bank and their own liability, whereas a seller is trying to achieve the highest possible price, so it is not uncommon for the appraisal to be lower than the selling price. – JBentley Sep 10 '19 at 19:40
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A personal story, previously shared in an answer to another question:

For the last house I sold, the buyer was doing a no-money-down mortgage and had no money for a down payment. He was even borrowing the closing costs. We accepted the offer, but when the bank did the appraisal, it was short of the purchase price. For most home sales, this would not be a problem, as long as the appraisal was more than the amount borrowed. But in this case, because the amount borrowed was more than the appraisal, the bank had a problem. The deal was at risk, and in order to continue either the buyer had to find some money somewhere (which he couldn't), or we had to lower the price to save the deal. Certainly, accepting the offer from a buyer with no cash to bring to the table was a risk.

In our case, we got lucky. I found some errors that were made in the appraisal, got it redone, and the buyer was able to borrow all that he needed for the house at the previously agreed-upon price.

Despite pre-approval, there are many situations that can arise between the offer and the closing that will affect how much money will be needed at closing. A situation that ordinarily might not jeopardize the sale for a buyer that has a good down payment could unfortunately make the deal collapse if the buyer has little to no cash of their own to bring to the table.

Ben Miller
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Because, ultimately, the seller is likely going to have multiple offers for the house and will have to decide which to go with. In that situation, one of the most important weighing factors is: how likely is the seller going to manage to get to the finish line? Because there's actually a really long time between when an offer gets accepted and when the house is actually officially sold - usually between 1-2 months.

So, now, put yourself in the seller's shoes. You do not want to accept an offer that ends up falling through. You lose the time it takes for the deal to go bad. You lose the time it takes to get the house back on the market. You lose the time it takes to get more offers on it. And all this time you're losing? You're making house payments - house payments you wouldn't have to make if you accepted an offer that went the distance.

That's why sellers care about the downpayment. If there was an easy way to get your credit score and W2s, they'd want those, too. Not because they care, but because they want as much safety as they can get that the offer they're choosing will be finalized. If they have one offer from a fresh college grad with no credit and a 5% downpayment... and another slightly lower offer from a middle-aged couple with immaculate credit and 25% downpayment? They're accepting the second in a heart-beat - yeah, they might get more from the former, but they risk several house payments if the deal falls through.

Kevin
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    Agreed for the most part, except that "house payments you wouldn't have to make" is only true for those who are downsizing their property/mortgage (including switching to rented property where the rent is lower than the mortgage interest). Otherwise, you are simply swapping one house payment for another (which could even be higher if they are upsizing). For the the average transaction, the house payments are not the big issue, but rather the other factors you mentioned are the driving force. – JBentley Sep 10 '19 at 13:58
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    @JBentley Uh, no - and I've got firsthand experience with that. When we moved 16 months ago, we bought our new house first. After all, the real estate market was hot at the time: better to take our time to find a good home and manage to beat out any other purchasers, and then sell our old home afterwards. We already had to go 2 months where we made mortgage payments on both homes. If the sale of our house fell through, we'd be making another 1-3 months of payments on both homes. – Kevin Sep 10 '19 at 15:47
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    Ok, you are right, I should have included that in my list of cases it applies to. But it doesn't change my point, which is that this is only a concern in specific circumstances. I'm not familiar with the USA market but in the UK market the most common type of transaction is a "chain" where A sells to B and buys from C simultaneously, and the payments cascade. Most people cannot afford to do what you did (as it requires having capital for two properties), so it is not as common. – JBentley Sep 10 '19 at 16:20
  • @JBently... sort of. I mean, Not sure about the UK, but the typical way of doing it in the US is a "Bridge Loan". You buy a house, and do the financing with a bridge loan - which is basically goes against the theoretical sale value of your current house. The downside with them is that they're built to be temporary - 6 months, 12 months, etc. So if you take the bridge loan, you need to be selling your current home relatively quickly. – Kevin Sep 10 '19 at 17:44
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    To tell the truth, a lot of "sell first or buy first" depends on the market. I mean, if you're in a hot market, you almost have to buy first. Because it'll take awhile to find an acceptable house where your offer will be accepted. (When we did this, the housing market was so hot, that we had two people that looked at our house the same day it was first listed.) In a hot market, you're not worried too much about being able to sell your current home. But in a cold market? Selling your home is the hard part - so you generally sell first, and then find a new place. – Kevin Sep 10 '19 at 17:47
  • We have bridging loans too, but they charge high interest rates, and they can foreclose fast if you do not pay them off on time, so they are generally only used by either sophisticated investors or people who are desperate. – JBentley Sep 10 '19 at 19:45
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    we made mortgage payments on both homes it's worth pointing out that the only true loss from doing that is the interest portion of the payment, since you will recoup the principal via increased equity once the house actually does sell. So it's really more of a monthly cash flow problem then an actual "loss" problem. – dwizum Sep 10 '19 at 20:12
  • @dwizum The interest portion of the payment is usually substantial. – Martin Bonner supports Monica Sep 11 '19 at 16:29
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Here are some reasons sellers might care about the down payment amount:

  1. Bigger isn't always better, but generally, as the size of the down payment goes towards $0, the likelihood of the deal falling apart due to financing problems increases. There is probably a point of diminishing returns though, say around 5% or $10k (whichever is greater), after which point it probably doesn't make much difference; e.g. someone with bank approval putting down $20k on a $300K house isn't that much more likely to fall through than someone putting down $150k on that house. If a seller asks for this reason, it could be just to identify low down payment amounts as a possible risk.
  2. Some sellers care about the future of their home, especially if they built it and are the original owners. They may want to make sure their home is maintained and cared for far into the future. The larger a down payment, the lower the monthly payment, which means the less chances of foreclosure down the line.
  3. Similar to #2, some sellers are good friends with their neighbors, and may remain friends with their neighbors even after they move. They may want to make sure their neighbors get a new good neighbor. Maybe there's a correlation between a larger down payment and having more cash to buy nice toys. Surely Mr. Big-Down-Payment who is obviously well-to-do and has a shiny new snowblower will be happy to let their neighbors borrow it!

Ultimately though, the down payment amount (above a certain threshold) really shouldn't matter, and for the most part probably doesn't matter nearly as much as purchase price/concessions, and an overall "good vibe".

TTT
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The other answers have focused on the likelihood of a sale falling through, but I think there is another side to this.

Given two otherwise identical buyers, if both can borrow the same amount of money, the one with the larger deposit can potentially afford to pay more for the property. Knowing the size of the buyer's deposit is to the seller's advantage if they want to make a counter-offer, as it gives them a better idea of what the buyer can afford.

user3490
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    the one with the larger deposit can afford to borrow more money and thus pay more for the property - do you have a way to justify that? I'm not certain I've seen any strong evidence that there is a correlation between down payment amount and borrowing capacity. – dwizum Sep 11 '19 at 16:33
  • @dwizum You're right, and I've rephrased. I think there's still a point here though. – user3490 Sep 11 '19 at 16:36
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    Sorry to be nit picky, but although what you're saying is true, the seller won't know that the two buyers are "identical" or can borrow the same amount - the seller doesn't know how much the potential buyers have been approved for. All they know is, buyer A offered $180k on loan and $20k down. Buyer B offered $190k on loan and $10k down. They don't have any idea what maximum amount A or B have been approved for. For all they know, A was approved for $900k, and B was only approved for $200k. Or vice-versa. There's nothing in the offer which indicates who has more borrowing capacity. – dwizum Sep 11 '19 at 16:44
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    One significant limiting factor for borrowing capacity is the loan-to-value ratio. If both buyers are up against this limit then the one with the larger deposit will be able to afford to pay more. – user3490 Sep 11 '19 at 16:50