Small Down Payment Doesn’t Mean The Buyer is Not Qualified

Even with lending standards tightening up following the financial crisis, there are still a number of low-down payment loan options for qualified buyers.

Unfortunately, some sellers and their Realtors are making the mistake of pushing away these buyers by demanding a higher down payment than is truly necessary.

There seems to be some confusion on the part of these sellers and their agents as to what qualifies a buyer to get a loan, and whether that no-down payment buyer will be a good person to sell to. In many cases, a buyer with a twenty percent or more down payment is no more likely to get a loan than a no or low down payment borrower but don’t make the mistake of brushing aside a qualified buyer by demanding too high a down payment when selling your home! Unless you have multiple offers on the table and can pick and choose the best deal, a low down payment borrower can be just fine.

A small down payment doesn’t mean the buyer is not qualified!

Money Is Money – Whether From A Lender Or A Buyer

Some sellers – perhaps at the encouragement of their listing brokers – are asking for buyers to deliver a larger deposit or down payment than they need to. Sellers and their agents are free to ask for what they like for a home, and it makes sense to verify that a potential buyer has the ability to pay for the home. But these special buyers are receiving pre-approval for a loan from a major lender, which means that the money is good – it is just coming from the lender as opposed to the buyer.

Getting a low-down payment mortgage today requires all the same steps as getting the average loan and in many cases even more documentation. The individual applying must meet strict criteria to qualify. He or she must provide tax returns, financial statements and proof of income. The lender goes over all the buyer’s information to verify that the applicant has the means to pay back the loan. Also with low down payment mortgages in Canada there is a need for the mortgage to be insured typically via CMHC (Canada Mortgage and Housing Corporation)

Only then do they offer a mortgage pre-approval. Just be sure what you are receiving is actually a pre-approval and not a pre-qualification. There is a huge difference between these two types of mortgage letters. Some buyers and real estate agents get confused and submit offers with the far less desirable pre-qualification.

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Why Some Choose Low Down Payments

Sometimes a buyer will put down a small amount of money when purchasing a home and it has absolutely nothing to do with the common reason of “that’s all they have”.

There are many occasions where a very well qualified buyer will still own their existing property and will be buying another home. When buying and selling at the same time borrowers will often try to purchase with a low down payment before selling their current home. They do this because much of their equity is tied up in their current home. In this circumstance they will typically refinance once their home is sold, often times at that point putting twenty percent down to avoid the cost of private mortgage insurance. Obviously if a buyer can afford to own two homes at the same time they are more than qualified!

Additionally, there is also a certain segment of the market who believe that when money is cheap it makes far more sense to have a large mortgage. Instead of putting extra money down, they use these same funds in investments that can make them money instead of being tied up in a mortgage. Many of these people are overqualified to buy your home. They choose to take their money and invest it in the stock market or other financial vehicles.

Lets also not forget about the mortgage interest tax deduction. Those who are financially savvy also recognize there can be tax benefits to having a larger mortgage. This tax deduction can be used to bring their totally yearly tax bill down.

These are just three examples why you can’t assume that a small down payment means the buyer is not well qualified. Your real estate agent should always attempt to verify the reasons behind why a certain amount of money is put down on the sale. Only then will you have a good picture of the borrower and decide accordingly how to handle things.

Final Thoughts

In the end, when you put your house on the market, you are there to sell. You want someone to pay you for your house so you can move on from it. Whether the money comes from gold bars out of someone’s cellar, or a check from a specialized loan, you can still get the same outcome from the sale. Sellers and listing agents should remember this when they consider who much they will demand from buyers.

If there are not multiple offers on the table, never discount the fact that a buyer with a low down payment could be just as attractive as a buyer who has more to put down. Look over all of the terms in the offer. Never assume that a buyer choosing to put less money down is your worst choice. Make sure you have your real estate agent do all the necessary due diligence to choose the right offer.

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