The amount of a buyer’s down payment can come into play when other factors in competing bids are a wash. On average, higher down payment buyers make 1.9 offers, while low down payment buyers make 2.4 offers.
When home sellers weigh multiple offers, they tend to be most interested in prices and proposed closing dates. But they also want to be sure the buyer they choose has the financial wherewithal to complete the deal, to avoid both wasting time and having to explain to future bidders why a contract fell through.
That’s one reason that even in hot markets, real estate agents mark contracts with “CASH” in giant letters when applicable. In competitive markets, it’s not because their offers are low and can be balanced by the assurance of cash; it’s because they’re competing against other high offers, and having cash might make the difference in assuring the seller that their buyer is for real.
For those not paying cash, it’s certainly not necessary to have a large down payment to secure a home. But the amount of a buyer’s down payment can come into play when other factors in competing bids are a wash. A Zillow analysis of data from the Zillow Group Consumer Housing Trends Report 2017 found that on average, buyers with higher down payments make 1.9 offers, compared to 2.4 offers for buyers with lower down payments (after controlling for how competitive the market is). Similarly, for every offer made by a home buyer with a higher down payment, buyers with lower down payments make 1.4 offers. When time is money, a smaller down payment can be costly.
“Sellers do need to feel comfortable that their potential buyer can qualify, and having more skin in the game in the form of a down payment tends to make people more comfortable,” said Zillow Director of Industry Outreach Jay Thompson, who was a real estate broker in Phoenix.
In some states, the down payment is included as part of the purchase contract. Even in areas where it’s not required, a buyer’s agent will sometimes include that information in a letter to the seller’s agent or in a letter from the prospective buyer to the seller. That’s often in addition to a preapproval letter from a bank, which is different from a prequalification letter in that the preapproval typically means the lender did a rigorous vetting of the buyer’s record, including pulling a credit report, Thompson said.
Even then, deals can go sour. “I’ve had deals fall apart two days before closing, because the client didn’t think the lender would pull the numbers again and bought a $40,000 Lexus, and now the loan debt-to-income ratios are out of whack,” he said. “A lot of agents have horror stories about that, and most of them spend a lot of time with buyers at the beginning of the process saying, ‘Don’t buy a car, don’t apply for a credit card.’”
And, it probably goes without saying, don’t touch that down payment money.
