The real estate market is booming for sellers — and that means buyers have to be proactive to get the home they want. One way to stay ahead of the pack is through a process called upfront underwriting.
It basically means you’ve already done all the work and have been approved for a mortgage loan. Corey Burr, senior vice president at TTR Sotheby’s International Realty, said it’s the second-best option after all-cash offers, where buyers can simply write a check for a property.
Burr explained that upfront underwriting is not contingent on financing or an appraisal of the property, “and what that means is that the buyer accepts the risk of losing his deposit if the loan is not approved, or if the appraisal comes in low.”
“The deposit is at risk if a buyer doesn’t make full settlement on the settlement date,” he said. “And the buyer would only lose it if a court orders it fully liquidated to a seller, or if the buyer and the seller agree themselves that the buyer will forfeit it to get out of the contract.”
Burr said it’s a risk worth taking for many buyers in this red-hot real estate market where bidding wars have become common.
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Upfront underwriting is appealing to sellers because it offers more reassurance than traditional loans that include a financing contingency, which allows buyers to back out of the deal if their financing falls through.
“I’m seeing it more and more used with this competitive environment,” Burr said.
“We’re really at the very peak of this competition right now. We’re in the height of a spring market when interest rates are at just below 3%,” he said. “This only happens for a short period of time because when the market comes off of its peak, buyers are going to want that safety valve of having a financing contingency and an appraisal contingency.”
For now, though, it’s still a seller’s market, so Burr advises buyers to “go in without the contingency on financing and without the appraisal contingency, but make sure you have a very close relationship with your lender and that your loan has been fully underwritten contingent on only the appraisal coming in, and that typically takes about 10 days after contract ratification.”
All-cash offers are still king, but Burr pointed out that many buyers don’t have that kind of cash in the bank.
“I mean, heavens, it takes a lot of money to stroke a check for the kind of property that somebody is trying to aspire to,” he said.
That’s where upfront underwriting can give buyers an advantage.
“Every real estate professional, when they have offers that come in, they just compare them all and they create a spreadsheet, and if all of the terms are similar, the buyer that’s all cash is going to win because it’s just the greatest amount of security for the seller that the buyer is going to make it to the settlement table,” Burr said.
“But not all of these offers in a multiple-bid situation are all-cash, and then it goes to somebody who is willing to go the route of no contingency on financing or appraisal with the highest income and the least amount of debt typically.”
