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Being a person that is the process of selling my home, my third home sale, I bring just a tad of experience.
We had two offers, and accepted the second offer, because they are bringing a lot of cash to the table. The amount of their mortgage will only be about half of what the house will appraise for. The other offer we had only had 10% down, and they needed the house to appraise for double of the other offer. So, they got passed up.
I am in So Cal, so we're talking about over a half of a million dollars.
Here is where I am looking for some outside input. I am going to just pull numbers out of the air, so you get a general idea on what I am asking.
Let us say that you have $200k in the bank, aside from all retirement, savings, etc.
Then let's say that you are looking to buy a house short-term (3-6 years.)
So, here is where the challenge comes in.
Knowing what the market is today, where the market has been for the last eight years, and where it might go tomorrow ...dot, dot, dot
Do you ...
A. Put up the 20% ... knowing you're a good cash offer that the buyer will like .... knowing that you take a risk on losing $100k plus if the market sucks in 3-6 years when you want to sell?
Or
B. Put up 5-10% .... going to FHA loan route, knowing that you might be passed over again, and maybe again, and still lose money on the house when you go to sell?
In scenario A you are willing to lose the $100k if the market tanks further, or again.
In scenario B you are willing to be passed over maybe multiple times, and maybe end up compromising on the home you'll be in for the 3-6 years, but you lose less out of your pocket.
So, what would you do?
Are you a gambler? Or one that wants to keep as much cash as possible and make do?
Iowa dweller here in one of the most expensive markets of Iowa. Our price swings from the market crash are less the your deposits. But if I could afford to live in SoCal in the same house I have now without 2 hour commute to any place nice, I'd also be living there
Your scenarios aren't the greatest because if someone goes FHA, why would they put more than the required 3.5% down? If they do 5-10%, they would be doing a conventional loan just like the 20% down person.
Also, just because someone puts down more money doesn't mean the house gets to appraise for less. The house needs to appraise for the contract price, otherwise a buyer would need to bring more cash to the table, and who is going to do that in the type of market you described? I think you were foolish to accept an offer just because of their down payment amount. I hope you looked at all aspects of the offer to determine which one was better.
Your scenarios aren't the greatest because if someone goes FHA, why would they put more than the required 3.5% down? If they do 5-10%, they would be doing a conventional loan just like the 20% down person.
Also, just because someone puts down more money doesn't mean the house gets to appraise for less. The house needs to appraise for the contract price, otherwise a buyer would need to bring more cash to the table, and who is going to do that in the type of market you described? I think you were foolish to accept an offer just because of their down payment amount. I hope you looked at all aspects of the offer to determine which one was better.
Agree. More cash down is not the same as an all cash offer. The larger down may give you more confidence about their ability to close, but in the end, the house still has to appraise for contract price to get the loan.
Agree. More cash down is not the same as an all cash offer. The larger down may give you more confidence about their ability to close, but in the end, the house still has to appraise for contract price to get the loan.
No it does not need to appraise for the contract price to get a loan.
Example:
House under contract for $500K. Buyer putting down 30% down ($150K cash). Loan needed will be $350K. All the bank cares is if the home will appraise for at least $420K. That way the $350K loan the buyer is taking out means it's worth at least 80% collateral to the banks.
Now it's totally up to the buyer whether they want the house at that point at that contracted price. Remember appraisals are still screwy these days. I got a very good deal on a home last summer because we were doing FSBO (both buyer and seller did not have agent) so the homeowner cut out easily 6% of what he could have gotten with an agent. The appraisal came back close to $40K less than the same 2 homes which closed within 6 weeks of the home I was buying. Same builder, same subdivision. But the appraisal decided to add a another distress property that had been on the market for 4 years to drive down the comps even though it was in a different subdivision and different builder.
It's like they purposely try to appraise it as low and close to my current contract price. And it's a shame. Appraisal should not have access to the contract price. They can fudge it anyway they want. And in my case, I complained to the bank cause the appraisal lied on the square footage of the distress property to make it without 10% square footage so he could include it. They never answered my phone calls or emails cause I called them out.
Sorry guys ... I must not have worded it right, because I didn't get my point/question across right.
The point of the post was would you rather put down the $200K knowing it makes you a stronger buyer, and you'll have a smaller mortgage payment?
Or, put down a much smaller down payment, knowing that you might get passed over several times before finding a house you like ... but you will put the extra $$$ in the bank should the market go down and you're in a screwed situation on the house?
For those that don't know the market out here (as well as other areas of the country) there were people that bought houses out here in 2006 for $800K and now they barely appraise for $500K. A lot of those folks make their mortgage payments and stay because they have no choice, and they put down a huge chunk of cash to get into their homes. As well as, they might be locked into higher interest rates, with no way to lower their payment. And, with the new law ... unless your mortgage was with Freddie or Fannie, you cannot refinance to try and get your payment down, because these are considered jumbo loans.
I'm just trying to figure out from a financial point of view, which one is the better strategy.
HUGz! Jules
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