The moment has arrived: after months of researching neighborhoods, visiting open houses, and working out the best offer price with your REALTOR®—your new home is practically in your hands.
Before the seller hands you the keys, there’s one last essential piece to figure out if you aren’t paying in cash: negotiating your down payment and mortgage with your lender.
There are many different lending options for home buyers to negotiate the terms of their mortgage rate. Of the 65% of Americans that own homes, mortgages were originated by…
- Banks: 43.9%
- Credit Unions: 9%
- Non-Depository Lenders: 47.1%
No matter which lending partner you choose to work with in financing your new home, it’s important to keep these tips and tricks in mind once you go into negotiations.
How to Get a Better Down Payment
Many people believe that a 20% down payment is typical for buying a home. However, in 2017 that number has significantly changed. According to the National Association of REALTORS®, 70% of first-time home buyers—and 54% of all buyers — made down payments of less than 20% over at least the last five years.
Since your mortgage will be worth much more than your down payment, it make sense to spend more upfront to lower your eventual costs. A lower down payment means longer mortgage debt. A larger down payment, on the other hand, can put you in a better position for your mortgage rate negotiations.
But a large down payment isn’t an option for everyone, especially in today’s market. What if you want a lower down payment with the same benefits of a better mortgage rate?
You can effectively reduce your down payment by negotiating on the purchase price of the home itself. Remember that most homes have a number of closing costs associated with them, which may include:
- Escrow fees, paid to an attorney in exchange for facilitating a close.
- Transfer taxes, imposed by your local or regional government on all real estate transactions.
- Fees for home inspections to verify the condition of the property prior to purchase.
- Transfer and/or documentation fees.
- Title Insurance.
Negotiating these fees can lower the total amount you will have to pay for your home, which will reduce the down payment. If an inspection discovers extensive damage or the seller wants to negotiate about move out dates, you can also use these examples to lower the price tag even well after you’ve made an offer.
How to Get a Better Mortgage
Step One: Be Prepared to Haggle (After All, You Won’t be the Only One)
The first thing you must remember when you start negotiating is that the person on the opposite end of the deal is prepared for you to negotiate. However, that shouldn’t intimidate you. On the contrary, it should provide you with a bit of extra confidence—especially in the opening stages of your negotiation. Why? Simple: if they come in expecting you to negotiate, then you should easily be able to push back against the initial mortgage offer.
Rob McLister, the founder of RateSpy, an online service that allows users to compare various mortgage rates, says that when it comes to mortgages, the initial rate offered is almost never ironclad. “There’s only a minority of cases [where] you have lenders that have strict everyday low prices all season that are inflexible,“ says McLister, “but even then the lenders can make exceptions for strong clients.”
Step Two: Read the Fine Print
You might be able to talk your lender down to a better mortgage rate, but don’t start celebrating just yet. The rate itself isn’t the only important part of your mortgage deal. Always read the fine print on your contract before you sign it.
Many lenders realize that their clients care most about rates, so lenders will make contracts stricter in other ways to justify lowering their rates. A conspicuously low rate might come with steep penalty fees, for example. You might also find yourself having less time to pay the mortgage off.
The good news is that you can also negotiate these details. Remember: nothing in the contract is set in stone until you sign it. Most lenders would rather change their terms than see you walk away from them entirely. With that said…
Step Three: Don’t be Afraid to Go Elsewhere
One of the best ways to negotiate a better mortgage (or down payment) is by threatening to choose another lender instead of the one you’re negotiating with.
The larger your mortgage is, the more likely this method will produce results. Larger mortgages mean larger commissions for brokers and more profits for lenders. The more money you stand to bring in for them, the more flexible they will be about the terms of your mortgage.
Negotiation Tactics to Avoid
If you are going to compare rates in front of a lender as part of a negotiation tactic, leave out rates that do not apply to the situation you are in. For example, you wouldn’t want to use the rates offered by a small private lender that works exclusively online when negotiating with a bank. Banks offer vastly different services and levels of support from smaller organizations, so they will not take the comparison seriously. All this will do is damage your credibility as a negotiator.
You should also be aware that it is practically impossible to negotiate with a lender when you are trying to break a mortgage. Lenders have an incentive to sweeten the deal for you when they are trying to get your business, but if you’re trying to leave them they’ll do anything they can to hold on to the money your deal represents. Typically, that means enforcing every single clause in your contract—so if you want to negotiate, do it before you sign any legally binding documents.
Negotiating a real estate deal can seem complicated, but it’s actually quite straightforward once you know what to look for. Understanding the relationships between mortgages and down payments can help you make acceptable concessions, and feel more confident in how you approach any lender with a new deal. After your mortgage is set, it’s finally time to settle in! Your home sweet home is finally ready for you.