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Everything about Fred showed discouragement. He had made offers on five different properties and had lost out to all-cash buyers on every single one.
Fred was well qualified for the price range he wanted: he had more than enough cash for a down payment and closing costs. His credit report looked just fine. We had evaluated all his documentation and issued a pre-approval letter to include with his offers.
Still, his offers were getting rejected in favor of people who had enough cash to write a check for the homes he was interested in buying. Although he was in good financial shape, writing a check for several hundred thousand dollars was not something he could do. He would make a down payment of 20% of the purchase price and get a mortgage for the rest.
He was ready to throw in the towel and put his dream of home ownership—a dream he’d had for several years and had saved for—on the shelf. He was starting to take these rejections personally.
As the housing market has begun to recover, investors, loaded with cash, have entered the market in search of bargains. Most home buyers make a down payment for a fraction of the home’s price and get a mortgage for the rest. They’ll order an appraisal and other inspections to assure themselves—and the lender—that the house they’re about to buy is sound.
They’ll make their offer with contingencies, which are clauses in their offer that protect them if they can’t get approved for the loan. They will offer to close the escrow in 30 to 45 days, to give the lender time to underwrite, approve and fund the new mortgage.
The all-cash buyer struts confidently to the negotiating table with a suitcase full of greenbacks (a cashier’s check, actually, but the suitcase is more picturesque). “I’ll close escrow in a week!” he says. “No contingencies.”
The seller is impressed. They believe getting a mortgage to buy real estate is a complex and uncertain process, with twists and turns along the way; and there are so many ways for a lender to deny the loan application, so the buyer who has to get a mortgage to buy the home represents a big “maybe.”
The cash buyer, on the other hand, represents certainty. They’ll deliver a cashier’s check and take the house in as little time as it takes the title company to research the home’s title and draw up a grant deed. What could be better than that?
While the “typical” buyer relying on mortgage financing will offer a price based on what other similar properties have sold for, the all-cash buyer is looking for a bargain; after all, Cash Is King, isn’t it? And those royal greenbacks should get royal treatment. That treatment is likely to be a significant discount from the asking price.
An all-cash buyer may be planning to use the property as a rental or to sell it quickly at a profit after applying some fresh paint and new carpets (a “flipper.”) He hopes to make much of his profit by purchasing at a below-market price. Poor Fred was willing to pay $400,000 for his new home, but an investor with a lot of cash might have been able to grab it for just $370,000. He was able to convince the seller that a Sure Thing (no contingencies and a quick close) was worth a $30,000 discount.
To start with, you must cover the basics: Apply for your new mortgage loan and get a solid pre-approval letter. This letter should specify that the lender has carefully reviewed your loan application and has given you a preliminary approval for your loan.
The second thing you should do is to make as large a deposit as you can manage to accompany your offer. This is called an “earnest money deposit” because it shows you are serious about buying. You don’t risk a penny of this money; if the seller doesn’t accept your offer, your Realtor® will return the check to you uncashed.
Now you should think about contingencies. A contingency in an offer to purchase real estate is a clause that protects you if something doesn’t go as planned. It might have wording like, “This offer is subject to the Buyer’s being approved for the loan specified in the offer.” This means that if for some reason you can’t get the loan, you are allowed to walk away, and you don’t forfeit your deposit.
All-cash buyers don’t have any contingencies. When the seller accepts an all-cash offer, they know the sale will close.
If you are confident that your documentation confirms all the information in your application, your odds of getting a final approval from the underwriter are very high. You and your loan officer may feel confident enough in your file that you decide to make your offer without a loan contingency.
This means that, as far as the seller is concerned, you now represent a Sure Thing, just as the all-cash buyer did. You have an advantage, however: you are not trying to get the ultimate bargain. You’re offering a fair market price for the home.
Although more buyers are using this approach, it does carry a certain amount of risk. If you are not able to get a final loan approval and you have to walk away from the contract, you could forfeit your deposit. You and your loan officer should feel very confident about your loan application before proceeding with a non-contingent offer.
Finally, although this may seem a little corny, consider writing a personal note to the seller. Tell them how much you love their property and look forward to making it a home. Buying and selling a home is an intensely personal and emotional process. That personal note to the seller may just be the one advantage you need to beat out all other offers.
There are no guarantees in life or in real estate, but using this approach just might level the playing field when you are facing all-cash buyers. Talk to your loan officer for more details.
If you’re just looking ahead and you’re not at the offer stage in the mortgage process yet, you can also read much more about the mortgage approval process in our ebook. We’ll help you prequalify for a home loan so you can be prepared to offer before your home search even begins.
Are you ready to apply for a mortgage to buy a home? Sammamish Mortgage can help. We are a local, family-owned company based in Bellevue, Washington. We offer a variety of mortgage programs to borrowers across the entire state, as well as Colorado, Idaho, and Oregon. Please contact us if you have mortgage-related questions.
Summary: Finding the home of your dreams takes a lot of time and effort. You don’t want to risk losing out on a deal when you put in an offer. This article will discuss ways to help ensure your offer…
You may be able to get rid of that expensive mortgage insurance without refinancing if your loan is in good standing, and it was opened before June 2013, among other requirements.