Do You Negotiate a Down Payment on an REO With a Seller Agent or Mortgage Broker?

Lenders require buyers to contribute a minimum amount of their own money to a purchase to minimize lender risk. As intermediary between you and your lender, the broker requires a specific down payment amount based on lender guidelines. You don't typically negotiate the down payment amount. For example, Federal Housing Administration loans require 3.5 percent down, whereas most conventional, non-government-backed loans require 20 percent down. Well-qualified home buyers usually have at least 20 percent down and receive better loan terms than buyers with minimal down payments.

An REO seller's agent, also known as the listing agent, considers the earnest money deposit an important indicator of how serious the buyer is. Similar to a down payment, the higher your deposit, the better your offer looks. Also known as a good faith deposit, this amount shows the seller you want to play ball and are willing to put money on the line. You stand to lose your deposit if you fail to meet contract terms -- mainly, close the deal. A competitive deposit ranges between 1 percent and 2 percent of the purchase price. You negotiate the deposit with the listing agent rather than your mortgage broker. The deposit goes toward your down payment and settlement costs at the close of escrow.

The purchase price is the main point of negotiation, as it directly impacts the REO seller's bottom line. Listing agents favor a higher purchase price, but they also consider the seller's costs, as these tap into the seller's net proceeds. A deal that involves a high purchase price and high costs, such as a seller credit to cover buyer closing costs, home warranty, and repairs, may render an offer less appealing. Negotiating a higher down payment in such a case helps if the purchase price and net proceeds also increase.

In addition to wanting the right down payment, the mortgage broker requires the home to pass the appraisal evaluation. An appraisal report is a third-party opinion of value denoting property features -- both good and bad -- that impact value. An appraised value that falls short of the purchase price requires you to increase your down payment to get the loan. Lenders finance up to a certain percentage of the value, known as the loan-to-value, or LTV. You offset the shortfall in value out of your own pocket to meet the lender's LTV requirement.