Choosing the best buyer: about lending

moneypileThe trend has been for listing agents to encourage their clients to accept offers that have  better financing. Because of this, commercial investors have a strong advantage because they frequently purchase for cash or with very high down payments. Whose interests are being served by rushing offers, then choosing buyers who are going to resell your house for more profit?

What the risks of choosing a buyer who has a mortgage contingency?

All Offers to Purchase will have pre-approval letters. There are three types of documentation that lenders will do prior to writing that letter. Unfortunately, there is not uniform term for what research has been done. You can confirm that the buyers have solid financing by contacting the lender. One phone call should do it (well, you may need to wait for a call back.) If I buyer will not give you permission to talk to their lender, this is a warning sign.

  • What is sometimes called “pre-qualification,” but also called “pre-approval” is when a lender has spoken to a prospective borrower and made note of what the borrower earns and owes. The lender also pulls a credit report and notes the credit score.

The risk with a mere “pre-qualification” is that the lender has not validated the earned income and debt. The buyer, with less experience in these matters, can easily forget details that could change the lending picture (like the presence of a bonus in last year’s income that is not guaranteed this year.)

  • What is usually called a “pre-approval” involves the lender seeing proof of income, assets, and debt, as well as pulling a credit report. This is good proof that the borrower will get the mortgage, based on the borrower’s qualifications.
  • What is called a “full pre-approval” or a “pre-underwritten pre-approval” involves the review of income, asset, and debt by both the loan officer and the underwriter who will be giving the final “clear to close” decision. This is excellent proof that the borrower will get the mortgage, based on their qualifications.

Once a reputable bank or mortgage broker confirms a full pre-approval, mortgages rarely fall through.

The reasons for failure are:

  1. Buyer loss of income due to termination, sudden disability or death.
  2. The house not appraising for the market value.

About that appraisal

houseWhen the real estate bubble broke, appraisers were in the hot seat for both sloppy and fraudulent practices. Regulation got tight; there were appraisals that came in low and scuttled sales. Those days are more or less over. The market is rising and appraisers are likely to confirm that your property would sell again for the price of the Offer you have in hand.

There is another commonly mentioned concern about appraisals. If a borrower is putting less than twenty percent down, the appraisal has to be acceptable to both the initial lender and a Private Mortgage Insurance (PMI) company. In the current market, values are strong and this is unlikely. However, as the market begins to fall again, it will come into play.

There is less risk than most sellers realize to choosing a fully pre-approved buyer, compared to a cash buyer. Did you buy your house without a mortgage?  Probably not. Most home owners cannot afford to do that. Choosing an Offer from someone who wants to live in your house, be a good neighbor, and enjoy your house or condo has intangible benefit.  Those non-pros are more likely to be invested in the community and the neighborhood.

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