06 Oct Should you pay cash or get a loan when buying a house?
By Jessica Rosato
Luxury Residential Specialist
Nestler Poletto Sotheby’s International Realty
With 5 closings in the month of May, it was interesting to find that most of my buyers, although fully equipped to purchase with cash, opted to get a loan instead. With interest rates still so low and the cost to borrow money so “cheap,” they decided that keeping their liquid assets free and getting a mortgage was a much better future plan. The question then became what company should we use and what does getting a mortgage these days involve. The first question was simple—my preferred lender whom I’ve worked with for years. The second was not so easy. Getting a loan today is a process and banks are not so quick to approve loans as they once were. Navigating the lending process requires great attention to detail, extreme organization, and most importantly, patience.
If you plan to finance, get a pre–approval first. Without it, you will not be in a position of power once you find the home you love and want to make an offer. To get a pre-approval you must provide specific documents to your lender (tax returns, bank statements, pay stubs, etc) and have him run your credit. With that basic information, the lender can tell you if you qualify and what your maximum loan amount will be, and then you can move forward confidently in that specific price range. Talking to a lender will also provide you with information on specific buildings that will accept financing (if you’re buying a condo), and also how much you will need to put down (usually 20% for single family homes and 30% for condos) among other valuable tidbits.
Even after getting a pre-approval letter, there is still work to be done. Once you find the home of choice, the formal application will be submitted and the appraisal set. Appraisals have been a major source of concern in our current market often coming in much lower than expected. A bank will only lend on the appraised value, not on the purchase price, so it’s critical that the home appraise out. If it comes in low, there are basically five options—buyer opts out, seller opts out, seller comes down, buyer comes up or both buyer and seller come to terms on an acceptable amount that both parties will contribute.
Once terms have been negotiated and all is a go, the lender will then finalize additional items and issue a loan commitment. Please note that this loan commitment is still “conditional” with other items that must be satisfied per underwriting guidelines to get the deal done. The underwriter may require more in-depth documentation, and without that, deny the loan. In some instances a lender can get an exception, but don’t hold tight to that, as you may risk loan approval or be up against “down to the wire” requests in the eleventh hour. No one wants that!
It is not uncommon that you are still dealing with last minute items the day of close. Come August 1, 2015, this will no longer be an option, or should I say, a problem. The closing statement (or HUD) is being revised and lenders will have to get the closing package to the title company (or attorney handling the closing) 3 days prior to close without exception.
Obtaining a loan can be a process, yes, but with preparation and organization, it can go smoothly. Be sure to keep things consistent though. Don’t get a new car. Don’t run up your credit cards—just hold tight with big financial decisions until you have keys in hand. Find a lender in-state that you can trust and make it a priority to reach out to him as the first step in your journey towards owning a home. Cash offers still hold more weight with 54% of all deals in Florida last year settled with cash. Sellers are often reluctant to take contracts with financing contingencies, but, as you can see, it does happen, and successfully, as all of my 5 closings this month were done with mortgages.