The old adage “cash is king” is truer than ever in today’s home sellers’ market. If you’re a buyer, competition is so fierce that the mere contingency of getting loan approval can wipe out an opportunity to secure your dream home. But rather than despair, you simply need to be prepared by taking one critical step: Complete your loan application and get it through underwriting before making offers.
Basic preapproval letters have served buyers well for decades, but in this market where many have cash to buy even the most expensive homes, such letters place you at a substantial disadvantage. In a typical loan-approval scenario, you might need about 30 days before closing and require an appraisal, which makes it hard to compete with all-cash offers that can close in two weeks with no contingencies. With only a preapproval letter in hand, in many cases, you wouldn’t even have a chance.
But you can gain an upper hand by completing the full loan application and have your lender put it through underwriting. Some lenders may be unwilling, but it makes sense to find one who will cooperate in this fast-paced, competitive market.
The process usually takes a couple weeks or more, requires that buyers provide their lender with all the information they need in a timely manner. The information may vary a little bit from one letter to the next, but basically it requires a few months of bank statements, copies of W-2s, income verification, and a credit check. A good lender requires this information for a basic preapproval letter, but they don’t usually take the next step: submitting it to the underwriter. And remember, once it’s sent to underwriting, you still may need to provide additional information in a timely manner.
The key benefits associated with going through underwriting include:
- The option to waive financing contingencies. In some cases, lenders may say it’s reasonably safe for you to make an offer that’s not contingent on financing because the lender has a high level of confidence that you will get the loan.
- The option to shorten financing contingency deadlines. Even if you don’t waive the contingency altogether, you may be able to substantially shorten the contingency timeline if your loan has completed underwriting. With a preapproval letter only, it usually takes 30 to 45 days to process a loan. Buyers with applications already through underwriting can shorten that timeline to just a couple weeks or maybe less (consult your lender). That reality can be very attractive to sellers who don’t want to take their property off the market and wait 30 days before they find out that the loan isn’t approved, and they have to start over.
- The option to waive the appraisal. In some cases, if you want to keep the loan contingency (short or long), you may still want to waive the appraisal contingency. With a loan, you’ll still need an appraisal, but by waiving that contingency, you’re simply letting the seller know that you’ll make up the difference with a bigger down payment if the home does not appraise. In this case, you must be certain you have the funds on hand for the bigger down payment. By the way, you can also use this strategy even if you have not gone through underwriting, but the overall offer remains stronger if it has been through underwriting.
- The option to set a much earlier closing date. If you complete the underwriting process, you’re in a good position to close earlier. Rather than a 30- to 45- day wait to close, you might be able to close as early as two weeks after ratification. Anything less than two weeks isn’t recommended, however, because title companies need time to get their work done.
Of course, before making any decisions on whether to waive financing or shorten the timeline substantially, it’s essential that you consult with your lender. We recently spoke to two of our favorite lenders to gain additional insights regarding underwriting a loan before making offers.
Matt Donnelly, a mortgage loan originator with PNC Mortgage, maintains that pre-offer underwriting not only makes sense, but it’s always been a smart approach. In fact, he’s been recommending for years that all his buyer clients seek full approval right away.
“It is important to understand the difference between a ‘prequalification’, a ‘preapproval’ and a ‘loan commitment,’” Matt recently told us. “While these are frequently understood to be the same, or similar, the difference can make all the difference!” He summed up the differences this way:
A ‘pre-qualification’ letter simply means the lender has had a conversation with the borrower, may or may not have reviewed some documentation, and is simply stating the borrower appears to qualify.
A ‘pre-approval’ letter is issued in cases where the lender has run the loan through an automated underwriting engine and received an approval. While this is very good, the issues may arise due to the “garbage in, garbage out” theory. If the lender is given bad information, or has computed income incorrectly, the automated approval may be invalid. A “real” underwriter will verify all income and funds and that may be different than the amounts the loan officer used. So a pre-approval is typically very accurate, it’s not foolproof.
A ‘loan commitment’ is issued only after all documentation has been gathered, the loan has been submitted to an underwriter, and the underwriter has issued a commitment. This ensures the borrower there will be no surprises. Most commitments will have “conditions”, but provided you know you can meet those conditions; your loan is guaranteed to close.
This final option can provide you the option to make an offer without a financing contingency. The seller is more likely to accept an offer that is NOT contingent upon loan approval. This will put you in the driver’s seat when making an offer particularly when most of the other offers are contingent on financing.
Eric Boutcher, senior loan officer with Atlantic Coast Mortgage explained that his company can do full underwriting for their clients before the buyer places an offer, but it does depend on the circumstances. For non-jumbo conventional loans, Atlantic Coast can do full underwriting for committed clients, but not for people who are still shopping for a loan, which makes good business sense.
Eric says that he does not recommend waiving financing on jumbo loans, Federal Housing Administration (FHA), and Veterans Affairs (VA)-insured loans because there at too many uncertainties. For jumbo loans, Eric says Atlantic Coast can send the loan through automated underwriting to get a strong preapproval letter. PNC does regular, manual underwriting for jumbo loans, Matt explained to us.
For FHA and VA loans, there are cases when you can still waive the appraisal portion of the financing contingency because of special loan programs offered by Freddie Mac and Fannie Mae, Eric explained. These loans must have a minimum down payment of at least 10 to 20 percent, and there are rules related to the property and the price. While they can’t always offer appraisal waivers, it’s a subject worth investigating.
If you want to participate in this program, you need a lender like Eric or Matt who participates and who can run the numbers on the specific property of interest before you make an offer. If the numbers work and the appraisal waiver is a possibility, you can make an offer contingent on financing but without an appraisal contingency. However, you might want to reserve the right to access the property for a non-contingent appraisal in case Fannie or Freddie waiver is suddenly not offered as option after you go under contract and complete the loan application.
Both Matt and Eric point out that you need to be aware that the commitment is conditioned on your credit and financial situation remaining basically the same until closing day. Any big change—such as losing a job, making some other large purchase, or even opening or closing credit cards—can jeopardize the loan, even though you have a commitment from the underwriters.
In fact, the loan is not officially done until the final days before the funds are disbursed for a particular property at closing. Even when a loan has made it through underwriting, lenders must re-verify credit, income, and assets days before closing. In addition, even when you waive contingencies, lenders will still need an appraisal and typically a termite inspection. Therefore, your contract must include provisions that your representatives may access the property to complete those actions.
You should always, of course, consult with your lender before making decisions on whether to waive or substantially shorten loan continency timelines. If you waive a contingency and then can’t get the loan, you could end up in default, lose all or part of your earnest money deposit, or more. If you’re concerned about these risks, you might consider keeping the contingency but substantially shortening the timeline. In any case, getting through underwriting will always make an offer stronger, without or without loan contingencies.
As we’ve seen particularly in recent months, today’s local real estate market is challenging and extremely competitive for buyers, but remember, it’s not impossible. Thousands of homes in the area are sold each month, you just have to be strategically positioned to be one of those buyers. In this environment, that means taking these extra steps—and eliminating speed bumps for sellers—that can often make a difference between preparing for settlement or frantically searching for that next possibility.
Angela Logomasini and her husband Christopher Prawdzik are licensed Realtors® with Samson Properties in Alexandria. Operating as D.C. Region Real Estate, they serve the Virginia, Washington, D.C., and Maryland real estate market and offer comprehensive real estate services, including 4½% full-service listings.
