Putting 20 Percent Down Can Make or Break a Deal

by Will Smith


There has been a lot of talk in recent months regarding the difficulty buyers are having in acquiring desirable, reasonably-priced homes. From multiple offers to tight financing, the challenges are more prevalent than many realize. Below, RE/MAX Allegiance agent Gregory Tindale explains why serious buyers should be prepared to offer 20 percent down on a property if they think there will be multiple offers.

Gregory writes:

Right now, the two most important people in real estate are the appraiser and the bank underwriter. Forget about the buyer, seller, realtor and loan officer. The appraiser and bank underwriter have complete control over whether or not a home can get financing.

When you get a home loan from a bank, it packages the loan with other loans and sells them to Fannie Mae and Freddie Mac. When all the no-down payment loans went bad from the real estate boom, Fannie Mae and Freddie Mac started auditing their files. These days, if they find anything wrong in the files they make the bank buy the loan back. That means that bank underwriters now are not taking any chances on loans because if there is an audit, the bank will have to buy the loan back and the underwriter will probably lose their job. The appraisers know this as well; if they get their appraisal audited and it is found they inflated the price, they could lose their job.

The result is that any loan with less than 20 percent down is heavily scrutinized by underwriters, especially when the property in question is a condo. Listing agents know this, and they advise their clients accordingly. They realize that if a prospective buyer puts less than 20 percent down, there are a hundred things that could raise a red flag to the bank underwriter who, erring on the side of caution, would reject the buyer for the loan.

This is why FHA loans are now becoming so popular — the buyer only needs to put 3.5 percent down, and the bank can still package and sell the loan to the government. However, if a condo building is not FHA approved already, a lot of the same problems come up with the 20 percent down scenario mentioned above. The result is that many listing agents are advising their clients to sell to a buyer that has a conventional 20 percent down loan, even if that buyer offers a lower price. The alternative is to risk the buyer having a problem with his or her loan and the deal not getting to settlement.

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This article originally published at http://dc.urbanturf.com/articles/blog/putting_20_percent_down_can_make_or_break_a_deal/1208


  1. Brandon Green said at 7:56 pm on Wednesday August 5, 2009:

    I’ve seen the 20 percent rule make buying, and selling, harder for a lot of my clients.

  1. roots said at 10:38 pm on Wednesday August 5, 2009:

    I’m putting 20% down and still having to jump through a number of hoops…

  1. ml said at 9:21 am on Thursday August 6, 2009:

    I put 20% down, and had to still jump through an inordinate amount of hoops for my idiot auditor.

  1. Keith said at 11:07 am on Thursday August 6, 2009:

    While helpful, the article skewed heavily towards condo buyers in the answer.

    In my opinion, there are too many variables, e.g. FICO score,  in the mix to state categorically that a 20% down payment - by itself - is going to help very much. For example, if you want to buy a condo in a building that has a very high percentage of rental units, I doubt you’ll get a loan regardless of a 20% down payment.

    I’d wait until the market improves before I’d sink 20% - a lot of money in DC! - into an asset with uncertain price stability.

  1. John said at 11:14 am on Thursday August 6, 2009:

    So how does a small condo like mine (4 owners in a converted Victorian) get “FHA Approved!” signage like the big boys down the street?  How do empty condo buildings get FHA approved when small condos with 100% owner-occupancy and a 2 year old condo association compete?

  1. FinnMcCool said at 4:59 pm on Friday August 7, 2009:

    Typical over reaction by the industry to go from zero to 20% down.  The unrealistic expectations (20% down) is holding the market back.

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