All-cash offers and contingencies: what you need to know
Kelly K. | Jul 22, 2021
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By Jennifer Shapiro on Feb 16, 2021
When people think of the American Dream, the first thing that comes to mind is home ownership. Owning a home of your own can be one of the most gratifying achievements in life and is a fundamental step to building long-term financial stability. It is, however, important to purchase only when you are ready, otherwise instead of you owning a home, you risk the burden of home that owns you! Unaffordable payments, maintenance and renovation costs can quickly bury a homeowner if they don’t take the time to calculate the steps and money needed before purchasing.
The time to figure that out is now, before you begin to pound the house-hunting pavement. Here are seven things to think about before you apply for financing or begin to house hunt:
A home purchase requires a lot of upfront cash, even with a traditional mortgage covering much of the sales price.
First, you will want to have money set aside for a down payment. While mortgage lenders suggest a 20% down payment as the ideal starting point, a down payment on a home loan can be as little as 3%. Obviously, the lower your down payment is, the higher your monthly mortgage payment will be and vice versa. You will want to do the math on what your monthly mortgage payments will be based on your down payment before you begin looking for a home.
Pro-Tip: A good rule of thumb to determine what you your monthly payment should be, is that it should be approximately 30% of your monthly salary. Fannie Mae’s guidance on this ratio is 31% and depending on your credit, certain lenders may go as high as 38%. Remember: your monthly payment should include taxes, insurance and maintenance fees like Homeowners Association (HOA) dues.
It’s crucial that you are comfortable with the monthly payment on a home before committing to it. Being able to afford the monthly payment is the #1 factor you are committing to when purchasing a house. Homeowners have the choice to snooze on upgrades or renovation costs at their discretion, but a monthly mortgage payment isn’t optional. The same goes for homeowner association (HOA) fees, taxes and insurance. These non-negotiables must get paid every month without exceptions, or you could find yourself at risk of foreclosure.
An equally important and overlooked step: make sure you have enough money in the bank after the home closes. It’s a good idea to have enough for a healthy emergency fund to cover six months of living expenses along with your monthly mortgage payment.
Make sure you meet the three C’s of mortgage qualification: credit, capacity to repay the loan and collateral
A borrower’s FICO or credit score plays an enormous factor in determining the interest rate a borrower will receive. Most lenders do have a minimum score for their program however, you probably want to make sure you are in the 700 club to take advantage of today’s uber competitive rates.
The biggest factor that dictates the interest rate is what lenders call your debt-to-income (DTI) ratio or, in simpler terms, how much money you make in comparison to how much you owe.
A good benchmark is Fannie Mae's guidance on debt-to-income ratio: a 31% housing ratio (the amount you pay monthly for your home) and 43% total debt ratio (the amount you pay monthly towards debts including housing monthly). These also are the federal cutoffs for the "Qualified Mortgage" rules that were written into the Dodd Frank Act.
The general cutoff point for a majority of lenders is around 45%. Student loans are also considered as debt by lenders. Alimony can be counted as both income or debt depending on whether you are giving or receiving it.
Just like any other loan, home loans have to be collateralized with an asset. In the case of a mortgage, the home itself is the collateral. One of the purposes of an appraisal is to determine if the value of the home is equal to or greater than the amount of the loan.
Lenders look for employment or income history that is stable. While it is not a black and white requirement that you be at the same job for two years, the general rule of thumb is that lenders look for at least two years of documented income from the same line of work (W2’s, 1099’S and paystubs). Lenders also like to see some stability. They are, after all, trying to build a file of evidence that demonstrates you will have future earnings to pay back on the mortgage.
Don’t necessarily fret if your employment history hasn’t been 100% consistent or your life circumstances have recently changed. There are many options for those who have good credit and strong income, despite some job insecurity or recent major life events like divorce or separation.
Pro-tip: Organizing this documentation of employment/income by finding hard copies and scanning them into electronic format.is strongly recommended. Things are moving very fast in today’s real estate market, and having your paperwork ready to be shared at a moment’s notice with a lender before you submit an offer can make all the difference. Even if you are going with a cash offer service like Accept.inc with full upfront underwriting, it will still speed up your approval process to have your documents in order.
If you decide to go the preapproval route, your offer will carry more weight if your real estate agent can attest that you have already submitted your proof of employment/income to the bank. Too often transactions fall apart because critical documentation was not received early enough, and by the time the underwriter (the person who gives final approval on the loan) receives the documents, it is too late.
The process works differently when you are making a cash offer. If you choose a to get cash-approved™ with Accept.inc, then this step is taken care of during the underwriting process upfront meaning that you get to use proof of cash funds, instead of a pre-approval letter when you submit your offer.
There is an art to building and crafting a paper trail for a mortgage file-particularly if your situation is not clear or straightforward. The sooner you can get your financial ducks in a row for your lender, the sooner you will know if you are ready to buy a home
Now that you have determined you have enough money for a down payment, and your credit score is strong enough, you should ask yourself if you are emotionally ready for a home.
Being financially ‘able’ is only part of the equation. As rule of the thumb goes: you must be ready, willing and able. So what does ‘willing’ mean?
In real estate, ‘willing’ is no different than wanting. In addition to being financially able and ready to close the transaction quickly, sellers want to see that you are personally invested in the outcome of the home purchase. Simply put: sellers want to know your heart is in it to win it.
What you don’t want is to purchase out of pressure or FOMO (Fear of Missing Out). Family or friends are telling you that the market is on fire, and you need to buy just because you can. It’s easy to feel an obligation to appease everyone. These are the wrong kinds of emotional signals. While purchasing a home in a competitive market will undoubtedly be stressful and scary at times, it should be driven by a longing and authentic desire for a deeper commitment to a place and to your own life goals.
You should feel ready to put down roots. Purchasing a home can create a sense of stability that allows you to make longer-term plans for your life. You are no longer at the whims of rental market pricing. The idea of spending your weekends fixing up your home or beautifying your landscaping sound fulfilling and exciting. You've been watching way too much HGTV and find yourself wanting to walk through model homes just for weekend thrills- these all can be signals that you are wanting a place of your own.
Most importantly: you’ve fallen in love with a neighborhood or at minimum, feel like you have found a place you feel comfortable in and feels like home. While you may not find the perfect house with this transaction, you should feel happy and at peace with the location you are buying in.
Remember- as real estate guru Barbara Corcoran says: “you’re buying the area; the house is just along for the ride…”
There are pros and cons to renting versus owning. Renting can offer residents the features and benefits of full amenities such as a pool, a gym or common areas without the headache or hassle that maintenance can often bring. Renting during times of uncertainty or life transition can be a safe way to take a time out without being tied to a mortgage. It can also be an expensive place to get stuck. Just like the housing market, rental prices are driven by supply and demand, with renters now making up 34% of the general population. At the same time, rent has increased by more than 36% in the last decade according to a recent study by RentCafe.
While there are minimal commitments tied to rent, there is also no progress made towards a larger goal of financial stability. Instead of building equity in your residence, you are putting money in a landlord’s pocket. You are also saving yourself the headache and hassle of maintenance. In the final analysis, your biggest way to measure whether it is better to rent or take a mortgage is to compare both monthly payments (don’t forget to include maintenance and taxes) side-by-side and compare them to your life goals.
2021 is already proving to be a hypercompetitive market due to a combination of record- low supply, record- low interest rates and unprecedented demand from the pandemic, all resulting in one of the most aggressive seller’s markets in history.
Given these factors, sellers are being pickier than ever. Offers backed by a traditional mortgage pre-approval are lagging behind in the race against cash offers to win in bidding wars.
If you’re going to get a home loan it is imperative that your mortgage officer, loan processor, and underwriter move as quickly as possible in removing your financing contingency. According to a recent CNBC report, 36% of real estate purchases are cash transactions. This means that sellers have their pick of their litter and aren’t going to wait around. One way of removing financial contingencies is to work with a lender who can upgrade your offer to a cash offer like Accept.inc.
Are you ready to begin paying on a home as early as 30 days from now? Are you ready to move? Timing is everything in real estate but in a hot market like this one it can make or break the deal. If your time box is more than 30 days, you might want to ask yourself if you are ready to buy in such a hot market. There should be more reward than risk
Buying a home doesn’t have to be a gamble when you’re conservative and in it for the long game. Calculate how much is needed for renovation. Don’t count your pennies when it comes to making a profit in the short-term. If you're purchasing to with the intentions of flipping the home and turning a quick profit, you might want to wait.
While house hunting on Zillow and cruising open houses have become fun cultural phenomena, we are currently in a market that is not for the faint of heart when it comes to purchase preparation. In a seller’s market with little or no inventory, being ready, willing and able on day one of your home search is no longer an option- it's a prerequisite to winning a home in 2021.
A home is one of the biggest purchases you will make in your life. It can be a gamechanger for your trajectory and bring years of joy and countless memories. But before anyone sells you a house, or you even to begin to house hunt, it’s important that you have sold yourself on why you are ready to purchase a home. We promise that if you do, it will make closing day that much sweeter.
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