Why do sellers care about down payments?

Question

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?

Answer 1

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?

Answer 2

If the appraisal is less than the purchase price and the down payment is small, the bank might not approve the mortgage.

Answer 3

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.

Answer 4

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.

Answer 5

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".

Answer 6

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.