Why sellers watch the loan process

By William Kugel

You've heard the expression, "Buyer, beware." How about, "Seller, beware?" I once talked with a man who had five offers on his house and not one buyer had been qualified to close the transaction. An elderly couple tried to buy it first, but their purchase hinged on a hospital buying their home. The hospital changed its plans and the deal on his house fell through too. A young couple made an offer that specified putting 5 percent down and obtaining a 95 percent mortgage. Their bank would only make the loan if the couple put 10 percent down. The couple then told the seller that they would get their parents to help with the larger down payment. When the couple asked their parents, however, the parents declined. As a result, he asked, "What can a seller do to avoid offers that are doomed to failure?" In this article, I offer some suggestions, including some that are unconventional, that may help you steer clear of a broken transaction. A lot has been written about making creative offers to buy real estate. But not as much attention has been given to the seller's side of the deal. And, as in the case above, much of the grief that sellers suffer from broken deals has to do with the buyer's ability to get either the financing or the down payment. Sellers have to be extra cautious when considering offers to buy their home. There is usually more at stake than first meets the eye. If you take your home off the market, maybe for several weeks, and then find you have no deal, you have lost precious time. If you are under deadlines of your own, or other pressures to relocate, you may feel desperate when your house goes back on the market the second time. Time is not the only thing you can lose. Sellers can lose their bargaining edge when desperation sets in. It is often very difficult to re-list your home for sale for as much as it was when first offered. The second time on the market may mean a price reduction just to get out of the starting box again. So, what steps can a seller take to minimize the risks of accepting an offer that ultimately fails? If I was selling my home, here are some of the strategies I might employ: Avoid or limit contingent offers. The problem with contingent offers is that someone down the line, out of your view and control, can fail to qualify and mess up all the other contracts. To take the danger of a daisy chain out of play, my recommendation is to write a counter-offer that limits the buyer to selling his property on a non-contingent basis only. Of course, it would even be better if you did not have to have any contingency in the first place. But the market may not be strong enough for you to totally ignore these kinds of offers. Another thing sellers are susceptible to is "creative" financing. If the buyer doesn't have a large enough down payment or needs to skirt mortgage insurance, the seller may be asked to carry part of the purchase price on paper as a loan. These are usually second deeds of trust referred to as seller carry back loans. Whether I'm asked to be a lender or not, I like to know the qualifications of the party offering to buy my property. Since my interests are affected by the outcome of a lender's evaluation, I like to obtain some of the same type of information on the buyer (or buyers) that the lender requires for loan qualifying.The most basic qualifying requirements are acceptable credit history, sufficient income (and job stability), and enough money for the down payment and closing costs. The best way I know of to get a feeling for a buyer's qualifications is to see their credit report and a copy of their loan application. The credit history will help you evaluate the likelihood of receiving timely payments on the loan. The standard application form will help you evaluate the buyers' employment, income, debt burden, and net worth. I know that requesting a credit report and a copy of the buyers' loan application is not a common practice. But, you are free to contract as you see fit. And, you have every right to employ some of the same tools that sophisticated institutional lenders use to make their decision, especially if you are being asked to be lender yourself.You may find some buyers reluctant or unwilling to furnish you that information thinking it too personal. Ask for it anyway. If they refuse, ask them to show these items to your real estate agent. I would want my real estate agent to call the buyer's agent and ask if the buyers' agent has 1) seen proof of the buyers' ability to make the down payment, 2) seen their credit history (and noticed any problems), 3) inquired about the buyer's income and job stability, and 4) was aware if the buyer's had made application with a mortgage lender. If I were the seller, I wouldn't want to risk taking my house off the market for an unqualified party. The credit and loan information can help you gauge how strong your buyers are and whether qualifying for a loan could become an issue. Request that buyers be pre-approved. Ask your real estate agent to publish a note with your listing that requests that buyers be pre-approved before making an offer. More and more buyers are taking the extra step of getting themselves pre-approved for real estate financing. Most lenders offer this service. However, be aware of the distinction between being pre-qualified and pre-approved. A pre-approved loan has been underwritten and the financing has been approved pending a satisfactory title and appraisal reports on a specific piece of property. A pre-approved buyer can be issued a conditional commitment by the lender. Being pre-qualified usually only implies that a borrower's qualifications have been examined and they appear to be sufficient to secure a loan commitment when they apply. Establish a timetable in your contract. If the original offer does not cover this point, you can stipulate in your counter-offer a timetable for application, pre-approval, and final approval. Another safeguard is requesting a non-refundable deposit after a certain point in time to defray your lost time and money when re-marketing your home.When involved in any of these scenarios, an experienced and highly professional Realtor can be very helpful as well. Good communications between all parties is the key to walking over the coals in these situations without anyone getting burnt. My hope is that these suggestions will help you avoid a broken transaction. The column MORTGAGE$ has been in publication for 15 years. William Kugel is a senior loan officer with GMAC Mortgage Corp., and a Mount Washington Valley resident. You may contact him at 888-777-5099, write him c/o of The Conway Daily Sun, visit the website www.gmacm.net/william_kugel or send e-mail to william_kugel@gmacm.com.All Rights Reserved. Copyright 2005, W.H. Kugel.