Most buyers do not have enough cash available to buy a home, so they need to obtain a mortgage to finance the purchase. Since the buyer will probably make their purchase conditional to obtaining a mortgage, the seller has the right to be informed of buyer's 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 the offer.
Financing is an important contingency. When we review the offer to purchase we will discuss the details of the financing condition. If the buyer has mortgage pre-approval the 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 accepted purchase price or the appraised value.
As part of the offer, the buyer will need to disclose the size of the down payment, which includes the good faith deposit and the balance owing after the new financing. Once again, this allows you to evaluate the likelihood of the buyer obtaining a mortgage. It is easier to get approved for a mortgage when there is a larger down payment.
Another reason for including financing information in the offer is to protect the buyer. If interest rates suddenly become volatile and rise quickly the buyer may be looking at a mortgage payment much higher than he anticipated. By putting a maximum acceptable interest rate in the offer, the buyer is protecting himself from such an occurrence.
At the same time, you will probably want to see that the buyer has some flexibility in the financing terms he is willing to accept. If interest rates are currently at four percent and the buyer indicates this is the highest rate he will accept, he would be able to cancel the contract without penalty if interest rates rose past that point. You would suffer because you have lost valuable marketing time and you may have made your own plans based on successfully closing the transaction.
Occasionally a buyer requests to have the seller "take back" a second mortgage to help facilitate the 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, he may be able to avoid paying mortgage insurance and save himself some money.
If a seller "take back" is part of the offer, the offer should include the terms the buyer wishes to pay on the second mortgage. Keep in mind that the first mortgage holder needs to know this information so they can underwrite the buyer's mortgage, and the lender may 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 the buyer is one of those rare individuals making a cash offer to buy a property, it makes sense that there is some documentation with the offer that shows that the buyer has the funds available. A bank statement would be fine. If the buyer has to liquidate stock or some other asset, the offer should give a timetable on when the buyer will provide proof the asset has been converted to cash.
Other Financing Details in Your Offer
The offer should also contain information on whether the buyer is obtaining a fixed rate or an adjustable rate mortgage. It should also state whether the buyer is obtaining conventional mortgage, or a high ratio mortgage.