Feb. 26, 2019.
These days, more homebuyers understand that you no longer need 20 percent for a down payment. There are plenty of low- and no-down-payment mortgage programs that can help. Another big mortgage myth involves buying a house in cash. While a cash offer may be the strongest offer, some specialty mortgage approval programs work the same way and benefit the 88 percent of buyers who can’t afford to pay in cash.
Case study summary: Buyers want to make a better offer without paying cash
- Eighty-eight percent of recent homebuyers financed their purchase, according to the National Association of REALTORS® 2018 Profile of Homebuyers and Sellers. Meaning, almost all buyers took out a mortgage instead of paying for a house in cash.
- A cash offer provides a stronger upfront proof of funds — and proof of a buyer’s ability to close. Still, most buyers can’t afford to make them.
- It takes the average homebuyer 7.2 years to save up for a 20-percent down payment on a house, the 2018 Zillow Group Consumer Housing Trends Report found. Though many first-time-buyer-friendly loan programs come with low- or no-down-payment, the Federal Reserve says 40 percent of Americans don’t have enough cash on hand to cover $400 in emergency expenses.
- Cash almost doubles the chances of winning a bidding war in a competitive market, Redfin confirms. But buyers who go beyond the standard home loan preapproval before ever house-hunting can have a “cash-like” advantage. Early, full mortgage approval communicates that a buyer is ready to close fast.
The challenge: Non-cash buyers aren’t getting enough attention
We’ve always been honest with our borrowers about the fact that cash is king when it comes to real estate. But we got tired of seeing borrowers miss out. Dream houses were being lost as sellers gave preference to cash buyers in hot markets.
We can’t do much about how much cash our borrowers have access to, but we do have total control over their mortgage experience. Sticking to our mission of transforming individual lives through lending, we went back to basics to come up with a solution.
How can we make buying a house easy in all possible scenarios, including competitive markets where more sales may be made in cash?
Finding a way to make buying a house easier when faced with stronger cash offers was critical since it affected our borrowers. Finding a “like-cash” solution impacts 88 percent of all homebuyers — because only about 12 percent of buyers are paying in cash.
The solution: Give borrowers the power of a cash buyer
The only way to make a non-cash offer stand out is to ensure it’s the most attractive to the seller. Without cash to seal the deal, pushing a loan through all three stages of the approval process — prequalification, preapproval, and underwriting — offers our borrowers the next best thing. This full loan approval is completed before a buyer ever starts house-hunting to prevent time and money from being wasted.
While mortgage prequalification is an important first step, full loan approval is different from getting prequalified. Here’s how:
- Prequalification gives our borrowers an idea of how much house they can afford to buy. Prequalification normally takes about 15 minutes.* And, it can be done online, through an app, or even on-site at a model home using a kiosk. Once a borrower knows how much they can afford, they can house-hunt smarter and avoid the time-waste. It’s a critical first step, but getting prequalified only offers a ballpark figure. This basic number isn’t enough for borrowers who want to put down a serious offer on a house.
- Preapproval is the second stage of loan approval that takes borrowers a step further. A borrower’s credit is pulled. More information about income and assets are collected. If everything looks good, a borrower receives a single-page letter from their loan officer that documents their ability to buy. Having a preapproval letter in hand is helpful to gain a seller’s attention, but it’s still not the same as a full loan approval that works close to cash.
Full loan approval gives a borrower complete approval for a loan amount before they make an offer. Borrowers who utilize our Early Bird Approval program get total loan underwriting in advance — signing off on income, assets, credit, employment, and down payment amount — to signal to a seller that they’re entirely ready to buy. For most sellers, time is of the essence, which is what makes a “good to go” cash offer so attractive. Fully underwritten loan approval can be as serious as cash. A loan will be locked in advance and ready to close once an offer is accepted. And, there won’t be any last-minute paperwork since everything’s taken care of upfront. This can be as good as having cash in hand when multiple offers are on the table.
Buying in cash can be a top strategy in a hot market. But for the majority who can’t afford it, advanced loan approval comes in a close second. Early Bird Approval helps buyers clear two big hurdles that derail a fast-paced real estate transaction: Cash competition and paperwork delays. Using early loan approval minimizes the chances of losing out to a cash buyer or getting delayed by last-minute paperwork that can cause borrowers to miss closing day.
Taking care of all the prequalification details in advance can give borrowers more leverage in any market. More leverage means more buying power, making it possible to buy bigger or in a better location for a lower price.
The Early Bird gets the dream house. Start here and get prequalified online.
The results: Early Bird borrowers beat out competition
Shannon Foley of Cornerstone Home Lending calls Early Bird Approval a “game-changer.” Full loan approval can take so much uncertainty out of buying, Foley says. It can make the entire loan process much less stressful for all parties involved.
Interestingly, Foley has seen Early Bird Approval provide a competitive advantage for her borrowers — and her team. “From a business perspective, it’s really given us an edge over our competition. Agents are happy to see our names on a preapproval letter. And we’ve gained some great referral partners due to this program.”
Foley recalls at least two recent instances where this stronger loan approval helped buyers win in multiple-offer scenarios. Because of this, Foley and her team plan to make Early Bird Approval their goal for all viable prequalifications in 2019. “That is what the Early Bird Approval is all about!” she says.
Many of our borrowers tell us that they seek us out based on the value of this early loan approval. Essentially, these borrowers are looking for the power of a cash buyer without paying the upfront cash. As one borrower recounts, he chose his loan officer because he could provide a loan that would put him in a much stronger position when making offers on houses. This loan officer followed through on everything he promised — closing the borrower’s loan in only two weeks, as well as offering guaranteed financing so the financing contingency could be waived. “All my friends and colleagues were amazed at how fast and easy the financing process was,” the borrower said.
We tell our Early Bird Approval borrowers that “your loan’s ready to go when you are.” Once a borrower finds a place they love, their fully-approved loan is ready to close fast. Faster closings are an indirect, money-saving benefit of early loan approval that buyers, sellers, and realtors appreciate. “I can say that [Bryan at Cornerstone] has a great team behind him: processors and underwriters who get the loan to closing on time,” a Texas real estate broker said. “In my nearly 20-year working relationship with Bryan, he always closes on time, if not early.”
You could already be home by now
If you’re ready to be home already, get in touch with a local loan officer and get your Early Bird Approval underway. Make a “like cash” offer. See sellers take notice. Get under contract right away.**
*During normal business hours.
**Pending appraisal and title commitment approval.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources deemed reliable but not guaranteed