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Finding the perfect buyer for your homeMary knows the real estate business. She excels at every aspect of a home sale: property preparation, staging, seller protection, advertising, closing and getting the best price. She is conscientious and works very hard to get the job done efficiently. I give her my highest recommendation.

—Rob C.

Home Selling Motivation

The motivation for selling your home will be a substantial factor in determining the kind of buyer you are looking for. For example, if you need to sell your Silicon Valley home because you have been offered a job in a new state, you may be willing to look for a broader range of buyers than if you are merely selling in order to buy a bigger home. Likewise, a buyer looking for an investment property may want different things than one who is looking for a home for their family. c There are many types of buyers with many different financial backgrounds, and often a buyer with a 10 percent down payment can be just as good as an all-cash buyer. In fact, due to our astronomical prices in Silicon Valley, we are seeing many less than 20 percent down loans.

Conventional Financing

When selling your home, you will likely be familiar with some of the basics of financing based upon your own experiences as a buyer. However, there are some important aspects of financing about which you should be knowledgeable to ensure that your perfect buyer can actually afford your home. How the buyer intends to pay for your home, and whether or not they are qualified for financing, is really the most important aspect of the entire sales transaction. We all know that without the money, there is no sale.

There are three primary sources for financing the purchase of a home: banks and credit unions, mortgage bankers and mortgage brokers. Most people are aware that banks and credit unions loan money for home purchases, including the former Savings and Loan associations. Savings and Loans, banks and credit unions lend money directly to the buyer from their own pool of funds, usually based on customer deposits. The individuals that work for the bank are usually called loan officers. Loan officers are often paid commission in addition to their salary, which provides their incentive to get loan applications.

Mortgage bankers are also direct lenders and use their own funds, or those of wealthy investors, but they usually do not keep the loan. They will often sell off the loan to a government-sanctioned major home lender like Freddie Mac or Fannie Mae. You might not even know if your loan is sold off, as mortgage bankers often continue to service a loan by mailing statements and collecting payments.

Mortgage brokers shop around for buyers of loans, searching for the lender with the program or interest rate that fits their client’s situation. They take the application and can apply to dozens of lenders like banks and mortgage bankers, and act as intermediaries between borrowers and lenders. They can’t control interest rates or terms and are usually paid by both the buyer and the lender through closing fees or points. The points paid to buy the loan are often the same as going directly through the lender. One point equals 1 percent of the loan amount. Regardless of whether a buyer uses a broker or a banker, the key is making sure that your buyer has obtained financing prior to making an offer on your home.

Prequalification and Preapproval

The terms prequalification and preapproval are often used by buyers and their agents, and it is extremely important that you know the significant difference between them. The difference is like thinking you can afford to buy a home as opposed to having the bank say you qualify. A prequalification letter says the buyer earns enough money to buy a home in a certain price range. Unfortunately, this is based on information given to a bank or mortgage broker by the buyer over the phone. The lender may not have verified the buyer’s income or run a credit report. Therefore they do not know if the buyer’s credit is wonderful or terrible, or if they can secure a loan to fit the buyer’s budget.

On the other hand, if a buyer has a preapproval letter, the lender has checked the buyer’s credit, gotten basic information on their income and debts and knows approximately the size of mortgage the buyer will qualify for. Based on the verification, the buyer would be approved for a loan. Obviously, you want to make sure that the buyer is not just prequalified to buy your home, but that they are actually preapproved. A real preapproval means that the buyer’s loan package has been submitted to a lending institution and has been approved. The only things needed to complete this loan are a purchase agreement signed by buyer and seller, a preliminary title report, and an appraisal. (Be advised that some lenders may generate a preapproval letter when really a prequalification letter should have been written. You or your agent should be able to ask a few questions and verify the actual status of the buyer’s application.)

Many lenders also perform “desktop underwriting.” If the buyer’s credit is good enough, and if it appears their income and debt ratios are strong, the lender can submit a loan application immediately by computer and then receive, almost immediately, an answer from an underwriter. Usually, it will come in the form of full loan approval up to a certain amount, subject to an appraisal of value on the property or with certain conditions that have to be met, such as verification of the information submitted. This is, of course, the best kind of information to receive from a buyer.

When you enter into a contract with a buyer there will likely be a deadline by which they must have full loan approval. If they do not obtain full loan approval by the contract deadline, the buyer may terminate the contract. If the buyer does not terminate the contract, they will be obligated to purchase the home or lose their earnest money deposit. This ensures that your interests are protected.

Another deadline to watch is the length of time for which the buyer’s loan is locked. A short lock period and a long escrow can be a bad mix! Early in her career, Mary once had a 90-day escrow, but the loan lock was a bit shorter. Unhappily, though all contingencies had been removed a month before, at the end of the escrow the buyer’s interest rate jumped up and the buyers no longer qualified for their loan! The house did not close escrow at all. Most escrows here close in about 30 days, though some go to 45 or 60. Just make sure that the loan lock time frame is as long as the escrow period.

Creative Financing

Because of the astronomical cost of housing in San Jose, Los Gatos, Saratoga, and surrounding areas, many buyers are choosing non-conventional loans so they can get their foot in the door. This is not easy in a seller’s market, but when a home’s been on the market for more than a month and multiple offers are no longer anticipated, this becomes viable again.  Many buyers borrow a commonly seen amount (80 percent) with a hybrid product, which is fixed for a certain number of years (three, five, seven, or ten), and then the loan becomes adjustable. Some borrow a conventional percentage but do it “interest only”. A frequently seen combination is the 80-10-10: with a 10 percent down payment, 10 percent second loan and 80 percent first mortgage. This product enables borrowers to avoid PMI (Private Mortgage Insurance). Others buy with 100% financing. More and more, move-up buyers are getting credit lines on their current home as a down payment in addition to a regular first loan; then, after they complete the purchase, they sell their first home and pay off the credit line. For families with small children who are in overcrowded homes, this can be a better alternative then selling first, while still in the home.

Some ideas our real estate borrowers like are the NIV or no-doc loan, also referred to as a stated income loan. With enough money down, usually 20 percent but sometimes only 10 percent, buyers can get one of these loans. NIV stands for “no income verification,” and designates a loan where the lender feels secure enough with the size of the down payment that they don’t concern themselves with verifying the income stated on the loan application. The lender may simply verify that the buyer is employed and that they actually have the resources necessary to cover the down payment and closing costs. A no-doc loan is a loan where the lender does not require documentation of either income or assets (assets in this case being the money to cover down payment and closing costs). Both of these loans will have a higher interest rate, as much as 1 to 2 percent higher than conforming loans. But when buyers can’t secure normal financing, these are still good loans to go after.  Finally, many of these loans went away after the Great Recession, but are back again, albeit with more stringent guidelines today.

Many Realtors® have also identified certain people who have money to invest, and who would like to earn somewhat more than the prevailing 30-year Treasury rate. For 1 or 2 percent above the current 30-year rate, they are often willing to finance a smaller mortgage

themselves. Sometimes such loans have balloon payments, meaning that after a period of smaller payments (perhaps five years), the entire amount becomes due. For people who have had credit problems but can demonstrate they are making efforts to clean up their credit, a loan such as this will often get them to the point where they can get conventional refinancing long before a balloon payment becomes due. When a buyer has very little cash to put down, a private lender may take other collateral instead, such as cars or business equipment.

There are many types of creative financing. All of them carry more risk to the buyer than normal conventional financing, and most will cost more in terms of interest rates. But there is little risk to you as long as the buyer has been preapproved. When you are looking for the right buyer, knowing that they have secured financing, even if through unconventional means, will ensure that your sale will be successful. Sometimes it’s the only way to make a deal work, and if so, you shouldn’t be afraid to sell to someone who is using creative financing. Just make sure you ask a lot of questions and have your Realtor® at your side.