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 conditional to obtaining a mortgage, the seller has the right to be informed of your financing plans in order to evaluate the strength of the offer to purchase. This is one of the major reasons that financing details are included in your offer.
Financing is an important contingency. When we write the offer to purchase we will discuss the details of the financing condition. If you have mortgage pre-approval your offer is more likely to be accepted. The mortgage approval process may include having an appraisal of the property completed by a professional appraiser and submitted to the lender. The lender will contact the appraiser they want to use. The appraiser will contact us and we will coordinate the appraisal. The mortgage amount the lender will provide is based on the lesser of the contracted purchase price or the appraised value.
As part of your offer, you will need to disclose the size of your down payment, which includes the good faith deposit and the balance owing after the new financing. Once again, this allows the seller to evaluate the likelihood of you obtaining a mortgage. It is easier to get approved for a mortgage when you make a larger down payment.
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.
Very occasionally a buyer requests to have the seller "take back" a second mortgage to help facilitate your purchase of their home. A seller "take back" is called a second mortgage because it must take a second position on title after the first mortgage. A second mortgage has a higher risk and therefore the buyer should expect to pay a higher interest rate than the holder of the first mortgage. In cases when the seller does not need all the proceeds from their sale in order to purchase their next property, 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 seller “take back” is part of your offer, you should include the terms you wish to pay on the second mortgage. Keep in mind that your first mortgage holder needs to know this information so they can underwrite your loan, and they have certain minimum requirements. The minimum payment can be "interest only" with a balloon payment at the end of the term. Longer mortgage terms and payments that also include principle payments and interest are possible.
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 mortgage, a high ratio mortgage, or a home equity line of credit.