Saturday, April 6, 2013

The mortgage contingency: What difference does it make to a seller whether you finance or pay cash? Plenty. Here's why.

You would expect that, with interest rates lower than they’ve been in living memory, even people worth trillions would finance.

If they finance, they can keep the money and invest it somewhere else.

But a surprising number of people are writing checks for their new homes.

We’re in a sellers’ market. There are many more buyers than there are properties. This is resulting in bidding wars. And in a bidding war, the offer that’s most likely to be accepted is one that doesn't have the word "financing" in it—even if it’s not the highest offer.

But the seller gets all the money at the closing whether the deal is financed or the buyer writes a check. So what's the appeal of all cash?

An all-cash deal involves the least risk to the seller. It also makes a co-op board very happy. And it allows a faster closing, as the parties don’t have to wait for the bank to provide the money. Banks are slow.

When you sign a contract to purchase a property, you accompany the contract with a check for 10% of the purchase price. If your offer, and the contract, is contingent on your ability to get financing and you can’t get it, the contract is void and you get back your 10%.

There are several reasons why you might not get financing, and not all of them have anything to do with you. The building might not meet the bank's requirements. Or the apartment might appraise at less than the contract price.

The deal could die and the seller could be back where he started, with nothing to show for the time lost except bills from the lawyer who drew up the contract.

There is a middle ground. If an all-cash offer isn't possible, the next best thing is a non-contingent offer.

If the contract is non-contingent and the bank doesn’t come through, you either have to pay cash for the apartment or lose your 10% deposit. You assume the risk, not the seller.

While this kind of offer is not as attractive as an all-cash offer, it’s better than one that’s contingent.

The risk to the buyer, however, is real.

Before the crash of 2008, banks had a happy-go-lucky attitude that resulted in large loans being made to anyone and everyone who walked in their doors.

We all know what this led to.

After the crash, banks rotated a full 180 degrees from their pre-crash liberality. For a while, nobody who actually needed a loan could get one.

Since that time, they've loosened up a bit. Somewhere along the line, they remembered that the way they make money is to lend it out and collect the interest.

But it's still not easy. Financing is by no means guaranteed, even if you believe you're well qualified.

There are ways to minimize the risk involved with a non-contingent contract.

First, before you do anything else including beginning your search for something to buy, consult a mortgage broker or a bank's loan officer.

He or she will analyze your financial situation, tell you how much you can afford to spend, and get you pre-approved by a bank for the appropriate loan.

Once you find the condo or co-op you want, have your mortgage broker or loan officer make sure the bank is willing to lend in the building you’ve chosen.

The bank’s willingness to lend in a given building depends on a number of factors: the ratio of owner-occupants to investors in the building, the number of apartments the sponsor still controls, the building’s financials, and also how many loans the bank has already made in the building. Most banks limit the amount of money they will lend in a given co-op or condo.

Third, try to get the apartment appraised BEFORE you sign the contract. This may mean that you have to pay for the appraisal yourself, but it will certainly minimize the risk.

And be aware that even if you’re only financing, say, half the purchase price, the property still has to appraise at the full purchase price or above.

Here’s a link to some excellent information about financing from Financing 101: How much home can you afford?

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