real estate

What sellers need to know about mortgages

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Highlights
  • Some buyers are more financially qualified than others.
  • Cash offers are more of a sure thing, but buyers often expect discounts.
  • A pre-qualification letter, plus more info, makes sellers feel more secure.

Home sellers who receive an abundance of offers might be tempted to grab the highest price and call it a deal. But that might not be the smartest way to choose the best offer of the bunch.

A better approach is to consider a variety of factors, including the buyer's ability to pay cash or obtain a home loan, according to Kris Berg, co-owner and broker at San Diego Castles Realty, a real estate brokerage company in San Diego.

"One of the first things we address is how strong the buyers are financially and how confident we feel that they're able to close," she says.

Cash only

An all-cash offer always merits consideration because a failure to obtain financing is "the most prominent reason" why transactions fail to close, Berg says. In some cases, the buyer is unable to qualify for a mortgage. In others, the appraiser's opinion of the property's value falls short of the purchase price, causing the lender to quash the financing due to a so-called low appraisal. With a cash offer, no lender is involved, so both risks are eliminated.

A cash offer isn't a guarantee, however. And there's another downside for the seller: Most cash offers come from investors looking to "fix and flip" houses they buy at a discount, says Bert Carpenter, senior loan officer at Nova Home Loans in Chandler, Ariz. These investors don't plan to occupy these houses for the long term, if at all.

Given cash buyers' expectations that they will get discounts, Carpenter says, sellers must weigh the risks of cash offers.

"You can take the all-cash offer," he says, "and it's a safe bet that you will get your cash at the end of the day. But you're only going to get X dollars. If you do your homework and pick a good, comfortable, reliable buyer who is looking for financing, you might make X-plus dollars. But the question is: How safe is that bet?"

'Prequal' letters

The answer is where pre-qualification letters, or "prequals," come into the analysis. Prequals are written by lenders to inform sellers that would-be buyers are qualified to obtain financing. But Carpenter says not all prequals are equal, so sellers -- or their agents -- need to do some legwork to assess which prequals are credible.

"My advice to a seller would be to take a look at the qualifications of the individual who wrote that letter," Carpenter suggests.

While loan officers shouldn't disclose the buyer's personal information to the seller's agent, that agent can call the loan officer and engage in a conversation about the buyer's strengths, Carpenter adds. One question might be whether the buyer could be characterized as "qualified," "well-qualified" or "barely qualified."

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Home sellers with plenty of offers may be tempted to go with the highest bidder.

But how the buyer will pay is just as important as how much they'll pay.

Cash offers are always attractive to sellers, especially considering failure to obtain financing is the main reason deals don't get done. But cash buyers usually expect a discounted price. And though nonpayment is rare, a cash offer isn't a guarantee.

Borrowers shop with prequalification letters to demonstrate their ability to pay for a house. But not all letters are created equal. Sellers would have to verify whether the borrower is qualified, well-qualified or just barely qualified.

FHA and VA loans carry a stigma with sellers. These government-backed loans require sellers to pay to fix certain defects. And VA loans require sellers to pay certain closing costs that might otherwise be shared with the buyer.

Steven Ornellas, a real estate broker at Steven Anthony Realty in Fremont, Calif., suggests that the seeds of this investigation can be planted even before the offers are received. The seller's agent can insist on a thorough preapproval and an understanding of the buyer's true financial capability.

FHA stigma

Some sellers automatically give the cold shoulder to buyers who want to get FHA or VA loans. FHA loans are insured by the Federal Housing Administration, and VA loans are guaranteed by the Department of Veterans Affairs. Both government agencies require sellers to pay to fix certain defects.

Ornellas says he sees the motivation to avoid such costs from the seller's perspective, yet he also says he thinks FHA loans don't deserve the stigma.

"Sellers might say they don't want FHA, but there's no reason for that," Ornellas says. "It's a case of not knowing what the facts are."

One fact is that most states require sellers to disclose and, in some cases, repair known property hazards regardless of the buyer's financing.

Berg mentions another twist, which is that VA loans require the seller to pay in full certain closing costs that might otherwise be shared with the buyer. Those costs can add up, again prompting sellers to kick VA loan offers to the curb.

"My husband is a veteran," Berg says, "and this breaks my heart … it's all about the money."

Closing deals

Naturally, there's a bit of self-interest in all advice of this type. Real estate pros say some agents push for cash offers to improve their chances of a commission and some loan officers tout a buyer's financial prowess to increase their odds of a paycheck. Either way, sellers should have the final say and the opportunity to choose the offer they prefer.

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