A cash offer is when a buyer can pick up their checkbook and write a check for the full amount of the agreed upon purchase price. Sometimes buyers who can pay cash and make cash offers will choose to get a mortgage for a variety of reasons, especially with today’s incredibly low interest rates.
Today’s real estate market is getting very aggressive with multiple offers on a single property, low inventory of quality properties and frustrated buyers. In order to make a buyer appear to the be the stronger candidate in a multiple offer situation, many real estate agents suggest removing the mortgage contingency from the offer, thus presenting the buyer as a cash buyer.
We see this practice more and more and it makes us uncomfortable because there are so many things that can potentially go wrong for a borrower during the mortgage process. This is a risky practice for many potential homebuyers.
Pre-Approved, Pre-Qualified, What’s the Difference, We’ve Got Cash!
• A cash offer means that the buyer can write a check, has the money available and can show you the account statements with the cash balances.
• Pre-approval means that the borrower’s full financials have been reviewed. This means: the down payment has been verified with asset statements; employment has been verified with W-2’s, pay stubs and tax returns; credit has been reviewed and the loan has been through an automated underwriting system and/or reviewed by an underwriter.
• A pre-qualification means that all the documentation has been reviewed but not underwritten in any way. Typically, a pre-qualification is issued by a mortgage broker, because for licensing reasons brokers are not allowed to issue a decision on a loan as a lender can.
What can go wrong if the borrower has been pre-approved? At Fairway it is our policy to fully vet all pre-approvals. As we like to say, our pre-approval letter is a promise of a closing—so why not remove the mortgage contingency since the borrower has been pre-approved? Because the borrower’s deposit can be at risk in many ways!
1. The borrower could lose their deposit if the appraisal comes in low; if the borrower is putting 50% down this may not be an issue for the mortgage lender though it might be an issue for the buyer. But if the borrower is putting down 20% and the appraisal comes in lower than the agreed upon price then the buyer has to come up with more money, pay private mortgage insurance or get the seller to reduce the price.
2. The borrower could lose their deposit if the seller will not budge in the price and the buyer does not have more money to put down and cannot qualify if they have to pay PMI.
3. The borrower could lose their deposit if the closing is delayed. All types of issues can come into play which can delay a closing which could lose a “cash buyer” their deposit since they have nothing to protect them from lender delays.
4. The borrower could lose their deposit if the legal details provided on a condominium association were not correct up front and the condo is later determined to be non-warrantable because incorrect information was provided.
5. The borrower could lose their deposit if there is information on the ‘fraud guard’ report that impacts financing as the report is pulled only after the appraisal report has been received.
6. The borrower could lose their deposit if the loan officer did a sloppy job on the pre-approval and missed some vital information that changes the lending determination.
7. The borrower could lose their deposit if the sale of their property falls apart for any of the reasons above after their buyers were pre-approved.
Let’s not forget credit refresh; There is no protection to any borrowers at the end of the transaction.
For all buyers financing today the final step of “credit refresh” can be a minefield. A minor miss on a credit card payment can tank a transaction.
From the time application is made until the day the loan closes it is vitally important that all borrowers:
• Pay all bills on time;
• Do not move money around;
• Do not change jobs or make major purchases;
• Discuss any issues that could impact their finances with their loan officer!
Cash is king in today’s real estate market but unless the buyer is royalty and has the check book to back them up or family who you can provide financing it is better to be honest in all real estate transactions about the intention to finance the property and make sure that deposits are kept safe with a mortgage contingency.
When there is a very large down payment in play it can be left to the educated borrower to waive any contingencies—but they may want an appraisal contingency just to be comfortable with the value.