Do I Need A Deposit With 100% Financing Offers?

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The answer is yes. Mind you, the only generally available 100% financing left is the VA loan, but few sellers are going to be willing to consider any offer that doesn't have a significant deposit.

Consider the situation from the seller's point of view, and the answer becomes obvious. Here is someone who is proposing to not put any of their own money into the deal. What's their motivation to consummate the deal? Not much, when you come right down to it.

No listing agent in their right mind is ever going to counsel their clients to accept a "zero deposit" offer. It costs money to give this person the only shot at a property for two months or more. (Nobody sane who needs a loan is going to want an escrow period less than 60 days - the time required to fund a loan has more than doubled in the last few years). At an absolute minimum, that seller is risking the money to pay their mortgage, taxes, and insurance for thirty days. On a $400,000 property, that's well over $3000, and the amount at risk for the seller is more likely to be twice that. This is money that is gone and they are not going to get back, all based upon the buyer's representation that they want the property. If the buyer isn't putting any cash at risk, there's no disincentive for them in trying to try for a property there's no way they'll qualify for. Meanwhile, the seller is out money on a daily basis from the time they agree to lock the property up in escrow.

Some of you are no doubt asking about pre-qualification or even pre-approval. The problem is that whatever the loan officer said, there's no real way to back it up. It is illegal to require that prospective buyers be pre-qualified or pre-approved with a given lender or loan officer - a strong case can be made that just the simple request is a RESPA violation. I have said repeatedly that the only pre-qualification or pre-approval that I trust is one that I did - but I can't require prospective buyers to do that, and any decent agent is going to learn to ignore the request.

The only thing that means anything to that seller in the way of a guarantee for buyer performance is cash - a cash deposit from the buyer that is at risk if they can not or do not consummate the deal in a timely fashion. This is even more the case than usual if the buyer isn't putting any of their own hard earned money into the deal itself. If a buyer is willing to put 5%, 10% or more into the deal, they ought to understand the effort that that money represents, whether it's through saving it or just through having it not earn 10 percent per year of thereabouts in the stock market. If you're putting up cash you've spent years saving, you understand what that money represents. If you haven't made the sacrifices to save such a down payment and you want to just waltz into a property without putting down a deposit, well, odds are that you've got a rude awakening coming. Because over forty percent of all purchase escrows end up falling apart. So if I'm acting on behalf of a seller, one of the first questions I'm going to ask is "What evidence is there that this person can consummate the sale in a timely fashion, and what are they putting up that they're willing to lose if they change their mind or can't qualify?"

Pretty much every agent who's ever had a listing has had offers come in that were rejected on the basis of "not enough deposit," or that were acceptable in every particular but that. The intelligent thing is counter for a higher deposit or fewer contingencies on it.

Some folks are going to ask about substituting a higher purchase price. The issue that you're going to run straight into is the appraisal. In most cases, offers that include 100% financing are a little inflated anyway. When you add still more money to that, a sufficiently high appraisal becomes difficult. Even if the appraisal comes in high enough, though, we come full circle to the obvious question, "What good is that higher purchase price if you never get it?" If the buyer can't qualify or changes their mind, you don't get that price, and since there is not much penalty for such an outcome, there is no reason for them not to tie the property up in escrow, where nobody else can buy it, either.

For these reasons and many others, nobody sane is going to accept an offer that doesn't include a deposit. Don't waste your time making one.

Caveat Emptor (and Vendor)

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About this Entry

This page contains a single entry by Dan Melson published on August 14, 2013 7:00 AM.

Privacy Concerns in Real Estate Transactions was the previous entry in this blog.

Deciding You Don't Want A Particular Mortgage Loan is the next entry in this blog.

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