In response to the fierce competition for homes in healthy metropolitan markets like those surrounding New York City, some mortgage lenders are taking steps to put buyers who must borrow on par with those offering to pay in cash.
Buyers in need of financing are finding they are at a disadvantage in competitive markets. Because inventory is so low, well-priced homes are drawing multiple bids, and sellers are showing a preference for offers that aren't conditional on financing.
Of course, buyers can sign a purchase contract without the usual mortgage contingency, which provides an out if they are unable to obtain financing. But they risk losing their deposit if their loan is declined.
To make borrowers feel more comfortable about proceeding without a contingency, some lenders are putting loan applications through a more thorough vetting process before the buyer enters into a contract. Luxury Mortgage in Stamford, Conn., has begun "pre-underwriting" clients in Westchester and Fairfield counties. Unlike a preapproval for a certain loan amount, usually based on a check of a borrower's credit history, pre-underwriting involves a thorough review of all the documentation required for a formal approval, said Peter Grabel, a senior loan originator.
The underwriting is done before a contract is negotiated, but usually after a house is selected and an offer accepted.
Mr. Grabel suggests buyers seek an appraisal before signing a contract, to forestall a financing shortfall should the value come in low.
Because pre-underwriting is time-consuming, with no guarantee of a signed contract, Luxury Mortgage is reserving the process primarily for borrowers with complicated finances, Mr. Grabel said. "We've agreed to do this very recently," he explained, "and I think it's only necessary when you have a pretty hot market."
Mortgage Master, a direct lender in Walpole, Mass., has also begun offering a level of preapproval that goes beyond a credit check. The lender verifies the same income and asset information upfront that is normally verified for a loan application.
The intent is to put the proposed borrower in the same position as a cash buyer, said Paul Anastos, the president of Mortgage Master. "What we're doing is in the infancy stage," he said. "It's been an educational process for us, because of how competitive the market is."
The housing markets experiencing the most "fiery" competition, he added, include the New York suburbs, extending into New Jersey and Connecticut, Greater Boston, the Washington area, and northern and southern California.
Pre-underwriting is not a phenomenon in New York City, where financing decisions are much more dependent on the type and location of a unit being bought, said Jordan Roth, the Manhattan branch manager for GFI Mortgage Bankers.
Given that the majority of sales in New York are related to condominiums and co-ops, "you need to go into a transaction with the mind-set that a client has a co-borrower in the transaction - the building itself," Mr. Roth said. "You can pre-underwrite the client through credit, income and assets, but you still need to know the financial health of the building in order to get a proper approval."
New York agents say sellers are not interested in waiting for a buyer to do an appraisal before contract, Mr. Grabel added.
City buyers may gain confidence about their loan eligibility by having the information on their application entered into one of the automated underwriting systems developed by Fannie Mae and Freddie Mac. But Mr. Roth noted that problems could still arise later on if discrepancies or unsourced cash deposits turned up when the lender examined the documentation.Source: NYTimes March 20,2014