Shooting Your Seller in the Foot
It’s easier to borrow less money than more… Right? The answer, like so many answers in NYC real estate, is not so simple. Consider the following. You have a listing and multiple offers are coming in. The seller prefers one bidder far more than the rest, and wants to pursue their offer. But they need a financing contingency and the seller understandably is reluctant to accept that risk. You suggest the following: let’s give the buyer a contingency, but not for the 80% LTV they request, we will give the buyer 60% LTV contingency. So if the buyer wants to finance more, fine, but if they apply for 60% and get financing, they must proceed even if they can’t ultimately get the 80% they desire. You explain to the seller that the buyer is far more likely to get 60% LTV loan (e.g. a lower loan amount) than the full 80% LTV loan (e.g. the higher loan amount). Sounds logical.
But be careful. The premise is sound, provided, that the buyer has sufficient post-closing liquidity. Lending decisions are complex, and take into consideration the collateral value (appraisal), project approval (the building finances), the buyer’s debt-to-income ratios, and credit scores. But even if all these factors are stellar, a buyer must also have sufficient post-closing liquidity to support the loan. Typically 6-9 months of loan repayment, insurance and taxes. A buyer with limited post-closing liquidity thus might qualify for a higher loan amount that does not deplete his cash reserve. But the same buyer might fail to qualify for a lower loan amount that requires more cash into the deal, and thus leaves the buyer with lower post-closing reserves.
Inadvertently, you might be shooting your seller in the foot by restricting the buyer to a loan that they will not qualify for. So before you suggest offering a lower loan amount, carefully consider whether the buyer has the post-closing liquidity to support it. It might end up being a harder loan to get!
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