Dan's Papers - April 17, 2009

Last week, this column covered some of the issues that make mortgages another slippery stone in the path to closing on a property. In short, the state of affairs in financing right now is a tantalizing combination of cheap money and tight credit. But since not many buyers are walking around with a million in cash, those on both sides of a real estate transaction will probably have to deal with mortgage issues, in one way or another.

A few developments last week further complicated (or simplified, depending on your point of view) the mortgage industry. The WellsFargo Wagon is still a-comin' down the street, and maybe he's got something for you - if you're a client. But if you're a mortgage broker, there's nothing for you in that wagon. Not too long ago, WellsFargo announced that it would no longer give loans through mortgage brokers. In another blow to the mortgage industry, just last week Chase Manhattan Bank announced that it, too, will no longer lend via mortgage brokers. Even worse news, the PMI Group, the mega-mortgage insurer, has announced it will not underwrite loans that originated with a mortgage broker.

In addition to these complications in the industry and the general economic state of the world, there's a looming personal question: Can you get a loan at all, from any lender?

There's one way to find out, and that is via a "pre-approval." While these don't leave sellers jumping for joy and heaving a sigh of relief, pre-approvals are critical for anyone needing financing to buy a house. Before even making the call to a real estate agent (and wasting everyone's time), buyers can learn their credit scores and find out where they stand in terms of getting a loan, and for what amount. If there are red flags at this stage, chances are they will be blazing at the closing table, if you get that far.

As far as where to get a loan, buyers should shop around to banks and savings and loans, as well as, yes, consulting with mortgage brokers. Despite the recent news, that latter industry is not dead. Brokers are still a viable channel with some banks. But now, banks now have a lot of volume with their own direct-to-consumer business and that channel gets priority.

Once the decision of where to get the loan is made, the pre-cert process begins. Bank representatives look at the whole picture: all of the assets, income, employment, credit scores, and make a recommendation to the bank. That recommendation is in essence the pre-approval. If all goes well, within two to four weeks if you're lucky, the pre-approval morphs into a commitment letter from the bank. That commitment comes with conditions that must be met (and will be reviewed) at the time of closing, including another round of verification of employment, changes in assets and reserves. Buyers who want to be sure that the bank will come to and stay at the closing table in their time of need should see their financial picture at the time the commitment as a snapshot. At the closing, the pictures better match up, exactly - in other words, don't lose your job, don't buy a car or take on any more liability.

Because the banks are "sensitive" to changes in the financial picture, it behooves buyers, now more than ever, to get a mortgage contingency clause in the contract, e.g., make the sale of the property contingent on their securing financing.

For the seller, this is a touchy area. While no sane buyer who needs financing would risk signing a contract without a contingency (unless he doesn't mind losing his deposit), it creates doubt for the seller. Needless to say, cash buyers have a bit of an advantage these days, but according to insiders in the real estate industry, the phrase "cash is king" has resulted in king-sized egos. Cash buyers, while a more sure bet for closing, tend to be the ones making the rock bottom offers to sellers.

Is it worth it for a seller to accept a lower offer from a cash buyer? Or a closer-to-asking bid from a buyer with a mortgage contingency? If you're the seller, that depends on the answer to these questions: Do you need money from a sale soon? Or do you need a specific amount of money sooner or later?

Sellers who go with a mortgage contingency contract can do a few things. First, find out if the buyer is at least pre-approved. Next, limit the duration of the contingency. For example, if the buyer requests a reasonable 30 days, and then wants an extension, ask questions. Has he has actually FILED an application and maybe ordered title search? If, after the initial 30 days, the buyer has done neither, you may want to think twice about granting an extension. (Remember, you can only be in contract with one buyer at a time. So granting extensions with one buyer means the property is tied up.)

There are some buyers out there. There is some money available to those with squeaky-clean credit. And there are certainly sellers. With a lot of due diligence, and perhaps nerves of steel, both can make a deal with financing happen.