In this heated market, an increasing number of buyers are making “all cash” offers where they are able to show that they have enough cash to pay for the home outright, even though the median price of a home in San Francisco is now around $1.9 million – I even heard of a home over $10 million that sold for all cash!
In order to be competitive, some buyers “waive” their financing contingency (the offer to buy is “contingent” on actually getting the loan) which will give the sellers confidence in the buyers’ ability to complete the transaction. This means that the buyers cannot cancel the transaction if they are unable to obtain a loan. If my buyers decide to waive this contingency, I guide them to obtain a full underwriter approval to assure the seller that they will actually get that loan.
It is essential to understand the distinction between this underwriter approval, and either a prequalification or a simple preapproval. So I recently spoke to Jim Argo of Guarantee Mortgage https://www.guaranteemortgage.com/agents/james-argo/, a very experienced and personable mortgage broker, about the various types of pre-approvals, and I will explain the difference here as I do to my clients.
A prequalification letter is the least binding from the bank’s perspective, and so the weakest to include with an offer. For a “prequal letter”, a lender representative speaks with you and asks a number of questions about your finances and employment history. Based on this informal, undocumented conversation, and the representative’s experience, a prequal letter can be given which is their best estimate of what you can afford and how much you can borrow. These are easy to get – and not much value to your offer.
The next level up is a preapproval that is given after an in-depth conversation with you and after you have filled out a comprehensive application and provided written documentation which includes but is not limited to tax returns, asset statements, and employment history. In addition, you will give permission for the bank to order a credit report. Now the representative can provide a preapproval with confidence that you can get a particular loan. This is better than a prequal letter, but not really enough in the current San Francisco housing market.
The strongest financing proof to include with an offer is a full underwriter approval, and the process may vary slightly depending on the size of the loan. A “conforming” loan is for less than $822,375 in San Francisco, which means that the loan meets the standards of the Federal Housing Finance Agency (a government agency), and Freddie Mac and Fannie Mae (Federally backed mortgage companies). Lenders prefer to deal with conforming loans as these are the only type that Fannie Mae and Freddie Mac will guarantee and buy in the secondary mortgage market. And as a result, conforming loans generally offer better rates to borrowers. These conforming loans may go through Artificial Intelligence underwriter approval, while the higher “non-conforming” loan (over $822,375 in San Francisco) goes in front of a human underwriter who reviews everything and concludes whether or not the bank will give the loan to the buyer.
In summary, even if you waive your financing contingency you have to convince the seller that you can complete the transaction. In fact, sellers will sometimes accept lower offers that are more certain to close. Many buyers are not familiar with these distinctions and if their realtor doesn’t suggest it they don’t get an underwriter approval, which is the gold standard and gives you a greater competitive edge, especially in a sellers’ market. It’s what I have all my buyer clients get – before you see the home of your dreams so you are ready to move quickly!
I’m happy to speak to you about this or other suggestions in prevailing in this very heated market.