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What's Wrong With Cash?

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Posted On: 11/25/2009

Q:I finally found my dream home after years of searching. The seller accepted my offer and everything was fine until I went to secure a loan (my credit rating is 818). Through coincidence the seller and loan officer work at the same bank. Apparently there was negotiation between them because I was told by the bank that my plan to put 20 percent down was not acceptable with the seller because the down payment was in the form of cash, which apparently takes 60 days to clear. I reluctantly agreed to the only option I had, which was 100-percent financing. A week or two into the contract I decided that the 52-percent debt-to-income ratio was not in my best interest and dropped out of the deal. The home is still for sale and my cash has since cleared but for some reason the seller refuses to entertain another offer.

A: You have exceptional credit, you have the financial capacity to put down 20 percent and yet the deal did not go through because of financing. My suspicion is that something has been misunderstood.

Seller's can pick and choose among buyers and do not have an obligation to accept a full-price offer. The logic is that even a full-price offer may have another requirement that's not acceptable to the owner, thus dooming the transaction. In this case, however, picking and choosing is not an issue if, as you say, your offer was accepted.

What we commonly describe as a real estate "contract" is often a contingent deal, something dependent on financing with no more than a certain interest rate, a professional inspection satisfactory to the buyer or a pre-approval letter from a lender within so many days. Was there a requirement in the agreement that you did not meet? For instance, would your financing require the seller to pay costs that were not part of the sale agreement?

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It could be that a big down payment and solid credit are not enough to qualify for a mortgage. Imagine that you have $100,000 in savings, have great credit, want to buy a $500,000 house -- but earn $63,500 a year. You would need $400,000 in financing. At 5 percent interest over 30 years your monthly payment for principal and interest would be $2,147.29. Add in $100 a month for insurance and $500 a month for taxes and you have a monthly housing cost of about $2,750 -- that's 52 percent of your gross monthly income.

In this case a lender would have good grounds to decline your loan application -- and you would have every reason to agree. Financing with debt-to-income ratio of 52 percent suggests a very-risky loan. A conventional loan would typically allow just 28 percent of your income to be used for housing costs and a total of 36 percent for all regular monthly debts. Other loans would allow higher ratios.

Has there been an appraisal that justifies the sale price? If the valuation was low the lender will not want to make a loan. Ask for a copy of the appraisal so you can review the sale value.

Have you tried financing from a different source? Given your ability to put down 20 percent and an exceptional credit score there should be no shortage of lenders who at least would want to see if you qualify for financing.

There's no reason it should take 60 days for a big cash down payment to clear. A typical arrangement is to first assure the seller that the money actually exists. A letter from your bank, brokerage or attorney will usually do the trick. You then bring a certified check to closing or have the money wired from your account.

Given your experience, can you do better? You bet.

First, speak with various lenders and see how much financing is available to you, and get a pre-approval or pre-qualification letter. This is not a promise to lend, but it does suggest that you're generally qualified to borrow a certain amount.

Second, get a buyer broker to represent you. This is a huge advantage for purchasers, especially first-time buyers.

Third, line up a home inspector.

Once you've taken these steps see if the property you liked is still listed. You might find in a few months that the price has come down and that the owner would again be interested in an offer.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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