Your Down Payment Can Also Be Part of Your Offer Strategy
One of the most common questions buyers ask is how much to put down on a house. While 20% has traditionally been considered the benchmark, buyers with greater financial resources may benefit from looking at their down payment as both a financial decision and an offer strategy.
There is another reason a financially strong buyer might initially structure an offer with a larger down payment—even if the buyer ultimately determines that putting less money down makes better financial sense.
A larger down payment can make the offer itself more attractive to the seller.
Imagine two buyers competing for the same home.
Both offer $2,750,000.
Buyer A proposes 20% down.
Buyer B proposes 30% down and provides documentation demonstrating that those funds are readily available.
All else being equal, Buyer B may appear financially stronger to the seller. That can become particularly important in a multiple-offer situation where bids are substantially above the asking price and may even be entering territory where the eventual purchase price is difficult to support with comparable sales.
Why?
Because the seller isn’t simply evaluating price. The seller is also evaluating the likelihood that the transaction will actually close.
A buyer demonstrating the ability to put substantially more cash into the transaction provides the seller with additional reassurance if the appraisal comes in below the purchase price.
But There’s an Important Caveat
If you’re going to write an offer representing a 30% down payment, you should actually have the ability to make that 30% down payment.
The California Association of REALTORS® purchase agreement contains provisions concerning the buyer’s financing and verification of funds. A buyer should never represent financial resources that don’t actually exist simply to make an offer appear stronger.
That’s very different from a financially capable buyer who legitimately has 30%, 40%, or even 50% available but subsequently determines—with the approval of their lender—that borrowing more and putting less cash into the property is the better financial decision.
Depending upon the terms of the purchase agreement, a buyer may ultimately obtain different financing than originally contemplated. However, changing the financing should not impair the buyer’s ability to perform, delay closing, or otherwise violate the buyer’s contractual obligations.
The important distinction is financial capacity versus financial strategy.
The Appraisal Is Where This Gets Particularly Interesting
Consider a buyer purchasing a home for $2,750,000.
With 20% down:
Down payment: $550,000
Loan amount: $2,200,000
If the lender is willing to lend 80% of the property’s appraised value, we can calculate the appraisal necessary to support that loan:
Required Appraised Value = Loan Amount ÷ 80%
So:
$2,200,000 ÷ .80 = $2,750,000
The property needs to appraise at the full $2,750,000 to support a $2.2 million loan at an 80% loan-to-value ratio.
Now consider the same $2,750,000 offer with 30% down:
Down payment: $825,000
Loan amount: $1,925,000
Using the same calculation:
$1,925,000 ÷ .80 = $2,406,250
That’s a significant difference.
Although the buyer is paying $2,750,000 for the property, a $1,925,000 loan would theoretically require an appraisal of only $2,406,250 to maintain an 80% loan-to-value ratio.
That additional cash can therefore provide a substantial cushion when bidding aggressively.
And That Can Matter to a Seller
When several offers are pushing a property into previously unsupported price territory, the seller may reasonably ask:
What happens if the appraisal doesn’t come in at the contract price?
A buyer demonstrating 30% down may give the seller considerably more confidence than a buyer whose available cash barely covers 20%.
And here’s the really interesting part:
The buyer may have every intention and ability to put 30% down when making the offer, yet after the appraisal comes in and the loan is finalized, determine that putting only 20% down is the better use of their capital.
Provided the financing change is acceptable to the buyer’s lender and doesn’t interfere with the buyer’s obligations to the seller to delay of close escrow, the buyer may be able to restructure the financing accordingly.
In other words:
The larger down payment demonstrates financial strength.
The eventual down payment can be a financial-management decision.
Those are two different considerations—and understanding the distinction can be extremely useful when competing for a home.
As always, thansk for reading along. We’re happy to have you!
Drew and Christine Morgan are experienced REALTORS® and longtime Mid-Peninsula real estate professionals based in Belmont, California, where they own and operate MORGANHOMES, Inc. They help buyers and sellers navigate important real estate decisions with experienced guidance, thoughtful strategy, and highly personalized service. Their achievements include RE/MAX’s prestigious Diamond Club Award, recognition among the Top 50 RE/MAX agents nationwide, and ranking among the Top 3 in Northern California.
To speak directly with Drew or Christine, call (650) 508-1441 or emailinfo@morganhomes.com.
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This article provides educational information and is intended for informational purposes only. It should not be considered real estate, tax, insurance, or legal advice; it cannot replace advice tailored to your situation. It’s always best to seek guidance from a professional familiar with your scenario.
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