Feb. 17, 2018.
As exciting as it sounds, a bidding war isn’t any fun. You might find yourself in one if you’re trying to buy a home in a housing market with very tight supply. Houses in these sellers’ markets can get multiple offers per listing, making the steps you take leading up to placing an offer on a home even more important.
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Want to win a bidding war? Get fully approved for a mortgage first
Depending on where you’re buying — like San Jose, Raleigh, Seattle, Austin, Denver, or Nashville, all named in Zillow’s hottest housing markets for 2018 — housing supply could be limited. Annual data from the real estate brokerage Redfin shows that, as a whole, U.S. housing demand remains high. Redfin’s Housing Demand Index, scaled to an average value of 100 for the years 2013 to 2015, reached 127.6 in December 2017. Compare this to housing demand in January 2014 that dropped as low as 83.3.
If you’re selling your home in one of these markets, this is a good problem to have. As a seller, you may receive multiple offers on your home and could sell it above asking price. But when you turn around to buy, you might encounter the same multi-offer roadblock. The only way to get into the home you have your eye on and stay within your price range is to stand out from the competition.
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To stand out in the eyes of a seller, get fully approved first, Michelle Gonzales at Cornerstone Home Lending, Inc., NMLS #293295, says.* “We like to get a buyer fully approved upfront so they have all the paperwork taken care of. Once they find their perfect home, they can be less worried about the loan.”
The purpose of getting fully approved for a home loan first is simple. It can add weight to your offer:
- A fully underwritten home loan approval goes beyond prequalification and a standard preapproval letter provided by a lender.
- A fully underwritten home loan tells a seller that your mortgage financing will be approved by your lender and is capable of closing when the offer is accepted.
Gonzales explains that buyers have more sway in a multiple offer situation with a fully underwritten loan. In this case, she says, the seller knows the deal is solid and has been through underwriting in comparison to other buyers who have only prequalified — or haven’t talked to a mortgage lender at all.
Another big benefit of getting fully approved before house-hunting, Gonzales says, is taking care of the details in advance. “A buyer will not want to deal with paperwork once they are under contract. They can just start packing and getting everything lined up for the move.” With a full home loan approval, you’re likely to get your loan funded and get into your new home faster.
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To recap: 4 ways a fully approved home loan could win a bidding war
Getting prequalified for a mortgage is an important first step. It can tell you how much you may be approved for and how much you can afford to buy.
But taking it one step further to meet with your loan officer and get fully approved for a mortgage can help to strengthen your purchase offer by:
- Letting a seller know you’re serious. When making a bid to a seller, even in a tight market, don’t aim too high or too low. Start at asking price and go from there. A seller with multiple bids on a house might surprise you by being more interested in your offer backed by a fully approved mortgage because it shows you’re ready and able to buy.
- Making your purchase as close to a cash transaction as possible. Buying in cash can be a top strategy in a competitive market, but for those who can’t afford it, getting a full home loan approval comes in close second. If cash isn’t available, a seller may be looking for an offer that is as close to cash and as non-contingent, or uncomplicated, as possible. For example, cash offers don’t require a financing contingency that gives you the option to back out if your loan financing falls through. With a fully approved home loan in your back pocket, you may feel more comfortable waiving the financing contingency on a purchase contract. Waiving the financing contingency puts your earnest money at risk but may be a smart choice to entice a seller — as long as you feel comfortable after getting fully approved. Going all the way with a fully underwritten home loan that has been through underwriting with no conditions can effectively look as good as cash among multiple offers.
Helping a seller to feel confident that your loan won’t fall apart and will close on time. Having a full loan approval when you place a bid on a house tells a seller that your loan will close more quickly than a buyer who hasn’t gotten approved for a mortgage. Most sellers in hot markets are on the lookout for the icing on the cake. A quick closing means they’ll get their money to buy their new home faster, making your offer look more attractive.
- Allowing your loan to close in eight days or as soon as the seller agrees. According to the mortgage financing software company Ellie Mae, the average mortgage closing time sat at 43 days at the end of 2017. Home loan requirements and closing times can vary by buyer, but doing your homework first by getting fully approved for a mortgage in advance could shave your average closing time down to its bare minimum. In some cases, you could close on a house in just over a week if there aren’t any hold-ups.
If your offer on a home is accepted, and if you’re fully approved for a mortgage, things will start moving fast. “We can close the deal quickly because all we will need at that point is title work and an appraisal,” Gonzales says. Luckily, getting fully approved for a home loan before you place an offer can be easy. Get in touch with a Cornerstone loan officer near you who can review your financial information, tell you how much house you can afford, and give you what many sellers see as a “stamp of approval” on any offer you make.
*Pending UW approval of appraisal.
For educational purposes only. Please contact a qualified professional for specific guidance.
Sources are deemed reliable but not guaranteed.