Cash Home Buying Trumps All
Cash home buying does not refer to buying a home with a suitcase full of Benjamins spread out on a conference table in some hush hush location after dark. Most home buying offers are made with a contingency clause requiring successful approval of mortgage financing. Typically there is a 10 percent down payment with this financing contingency. If you make an offer on a $500,000.00 house you put up 10 percent or $50,000.00 subject to your bank’s mortgage approval. If the bank rejects the mortgage application your $50,000.00 is returned. Everyone is back to Square I.
Cash home buying involves a buyer who is willing to waive the mortgage acceptance contingency clause and forfeit the $50,000.00 down payment if the sale doesn’t go through. Why on earth would any buyer take a chance like that? Because that cash home buying offer gives the buyer an edge in negotiations against other potential buyers who will only make the same offer if a financing contingency is in place on the property. A seller is going to sign with the cash home buying offer every time against an offer subject to a financing contingency. Why take the chance on waiting for a month or more for the buyer’s financing approval only to find out the answer was no? Any seller will be glad to do business with a buyer willing to delete the financing contingency condition. Having a large cash down payment certainly facilitates setting up arrangements with your lender so you can put your hands on it immediately.
Cash Home Buying Nuts and Bolts
Suppose the Seller and/or Buyer’s appraisal and Sale price is $400,000.00 and the lender’s appraisal is less, say $380,000.00? Banks base “Loan to Value” (LTV) on the lower of the purchase price or the appraised value. In this case the LTV is now 83.33 percent. To complicate things even further if the lender will allow the buyer to borrow more than 80 percent of the home’s value there will be the added expense of private mortgage insurance(PMI). Did the cash home buying technique backfire? Not really. No sane person is going to make a cash home buying offer without a plan “B” in case of the worst.
Cash Home Buying Plan “B”…All is Not Lost
The home buyer now will negotiate with the Seller for a lower price. The Seller, knowing he is on solid legal ground, will act offended. He will have made his own plans in reliance on the buyer’s legally binding offer. If the Seller won’t budge on the price the Buyer will now either have to come up with the difference to make the 80 percent ($16,000.00 here) or he will have to pay the PMI.
The takeaway here is that a savvy Buyer will only make a cash offer if he has the resources to handle any scenario he doesn’t anticipate but recognizes as a possibility. Only savvy real estate operators have any business making cash offers. Cash home buying means you will get the home you really want.
If you can afford the risk and you go in with open eyes cash home buying can be a deadly yet perfectly legal weapon in the arsenal of the shrewd real estate buyer.
“Minimum FICO” Rule
When buying jointly the person with the lower FICO score has the score that counts according to Fannie Mae, Freddie Mac, Lenders, Investors and Insurance Companies. I know this doesn’t make much sense but to get the best rate the person with the higher FICO score sometimes must apply on their own as long as their income supports the loan in order to get the best rate. Both can be on the legal title even if only one is on the mortgage.