Yes, you too can compete with the all-cash buyers in San Francisco’s residential real estate market. Here’s how it works.
Putting an offer on a house without any contingencies while still getting a loan may seem like a scary prospect — an offer with non-contingent financing. What if the loan doesn’t come through? Would you run the risk of possibly losing your deposit? Scary questions indeed but we’ve had many, many buyers win properties who weren’t all-cash without having to rely on a financing contingency. It can be done. And here’s why this seemingly impossible strategy works.
When a lender is evaluating a mortgage applicant they will look at 2 primary factors: the property at hand (and the proposed purchase price) and the borrower’s creditworthiness (FICO score, income verification and debt-to-income ratios). While you may not even know what the property will look like or even where it is, you do have control over your portion of the underwriting process by getting fully underwritten before even making an offer.
First, Let’s Talk About You.
By getting fully underwritten first before making an offer you’ll front-load the underwriting process by getting your part out of the way. In order to do that you’ll get what we called the “super approval.” That will involve giving the lender the materials that prove your ability to pay the mortgage you’re applying for. Those materials include the following:
- 2 years of filed tax returns (they will check with the IRS independently)
- Your last paystub + employment verification
- Proof of funds for the deposit and down payments in the form of Bank and account statements for savings, money market and retirement accounts
- Copies of rent checks for a year or two (mortgage payment records if you own)
- Explanation letters of any special circumstances
- If you’ve just gotten a new job, you’ll need the offer letter and the first pay stub
- If you’re getting a gift, a gift funds letter with proof of funds
That should take care of the first half of the two-step process. Now for the second half of the equation….
And About That House You Want…
As for the property itself, the underwriting process evaluates the property by an appraisal by a certified and licensed appraiser who walks the property, takes notice of nearby similar properties (comparable sales) and compares how the property stacks up against those others. Most times properties’ will appraise at the contract price even as prices keep pushing upwards. If a property fails to appraise for the contract price then a buyer must make up the difference between what the lender was to supposed to contribute the purchase and what the appraisal says they can give. This is the case because the lender will be most likely paying a percentage of the purchase price rather than an exact amount they’re going to pay. So instead of lending $800,000 of a $1M purchase the lender is really lending 80% of the purchase price, which is the golden ratio that lenders will want and the maximum amount a bank will lend before a borrower has to pay expensive mortgage insurance premiums. The appraisal becomes a moot point if your down payment is large enough to make up any shortfall prospectively. In this case if you put down more than 20% — say 22% or 25% — then there’s that much of a cushion.
But what if something pops up with the appraisal or otherwise that the underwriting gets halted? It would have to be very significant or severe enough to stop a lender in its tracks. Contingency-free offers also usually mean (if not contain addenda stating so) that the property is being bought “as-is.” This doesn’t mean, however, that a buyer is left without options if this pops up. Sellers are nevertheless obligated to disclose any material fact that would impact a buyer’s decision to purchase a property and/or have an impact on what price a buyer would be willing to pay for a property. So if there is something bad enough to stop a lender from approving a property that is not related to value, then it must be something that may rise to the point of being a material fact that was later discovered or disclosed, which may give you more than a reasonable basis to cancel the purchase, or at least an opening to talk it over again.
There’s a lot more nuance and details to go over which is why Kevin+Jonathan are here for you just as they are for their clients. Give them us a call or text today at (415) 297-7462 or (415) 215-4393 or email us at [email protected] or [email protected]
