The Importance Of Pre-Qualification

hen negotiating to purchase an apartment, making an all-cash offer can often clinch the deal and knock-out the competition; it may even earn you a discount to the asking price.   All else being equal, cash offers trump those offers for the same amount but which are contingent on the purchaser obtaining a mortgage. The seller knows that once a sales contract is signed for  an all cash  deal, the sale will go through (although, of course, in a co-op approval must still be obtained from the Board of Directors). Sometimes, however, purchasing for all cash might not be in the best economic interest of the buyer where, for example, a property is purchased as an investment rather than as a home. Leveraging the investment by obtaining a mortgage might be a better way to go in order to increase the IRR.

But what if you  don’t have the wherewithal to make a cash offer but nevertheless want the negotiating leverage that buying for cash provides?  A mortgage pre-qualification is the way to go. With a pre-qual, you’ve already submitted a mortgage application to a bank and have gone through its underwriting approval process even before you‘ve found your new home. You’ve provided the bank with income, assets and debt documentation, and based on that information the bank has sent you a qualification letter which you can show to a seller, assuring that the money is there to complete the purchase.  Note that you want to obtain a “pre-qualification” rather than a “pre-approval” which is often provided by a loan officer without documentation of your financial position having been submitted and without the bank’s underwriting committee having met and  considered your request.

Note that when it comes to the recitation of your legal obligations as written into the purchase agreement, a cash offer doesn’t necessarily preclude the possibility that you can nevertheless obtain a mortgage.  It depends on how the contract is written. In this regard the standard form of purchase agreement in New York  contains three financing options, only one of which will be applicable to each deal.

The first option is what is known as a “mortgage contingency” which specifies that within a specified time the purchaser will apply for financing with the sale being contingent upon the purchaser’s receiving a mortgage commitment for  not less than a stated amount at prevailing market rates.  If the purchaser cannot obtain a mortgage by a specified time, he or she may cancel the contract and recover the down-payment which was placed into an escrow account at the time the purchase contract was signed.

The second option is what is known as “non-contingent”.  The purchaser may (if he or she wants to) apply for financing but the sale is NOT contingent upon the purchaser receiving a mortgage commitment.  If financing cannot be obtained, the purchaser will forfeit the contract down-payment if they are unable to come up with the balance of the purchase price. The seller is then free to re-market the property and sell to anyone else, with no obligation to refund the forfeited down-payment to the original purchaser.

The third contract option is a cash offer or “all cash” as discussed above.  In this instance, the purchaser is not even permitted to apply for financing which could appreciably slow down the deal.

When a deal is struck the selling and buying brokers agree to a “deal sheet”. It contains pertinent contact information for everyone involved in the deal (buyer, seller, brokers, lawyers, management company, mortgage broker or loan officer) and specifies the main deal points (price, target closing date, cash or mortgage, special agreements).   The deal sheet should be clear as to which financing option applies, particularly where the purchaser’s offer is non-contingent or all cash.