Competing with Cash: Pre-Underwriting

We’re always talking about how confident the Rochester real estate market is. In any market that enjoys healthy competition, buyers want to know how to compete with cash offers. Historically, there wasn’t much of a way to do that, but now, some lenders are offering pre-underwriting—a more thorough vetting process that goes beyond the typical credit check of pre-approval.

Pre-underwriting is simply moving the underwriting phase up in the home buying process. Instead of the underwriter thoroughly checking a potential buyer’s documentation after the offer, they do it before the contract is negotiated. Essentially, as the lender has already taken that extra step in ensuring the buyer’s creditworthiness, the buyer gets a badge of approval, one that is a notch above pre-approval.

Pre-underwriting Competing with Cash

To understand why pre-underwriting makes a buyer more competitive, we need to understand the attractiveness of the cash offer. With most cash offers, the lender’s role is greatly reduced, meaning many cash offers won’t be contingent upon:

  • A property appraisal
  • An inspection
  • Insurance
  • Financing, which can take more than a month to come through

On a cash deal, as the buyer is not beholden to a lender, they can negotiate the first three items on the list. As cash buyers don’t have to wait for financing to come through, cash offers tend to close quicker, which is very attractive to sellers—so attractive that many sellers will accept a lower cash offer over a higher offer that’s dependent on financing.

Enter pre-underwriting. Pre-underwriting, however, is not offered by all lenders. As Peter Grabel, a senior loan originator with Luxury Mortgage in Stamford Connecticut, explained to The New York Times, pre-underwriting takes considerable man hours, which is a lot of work to put into buying a house that’s not under contract. That’s why Luxury Mortgage reserves pre-underwriting for borrowers with “complicated finances.”

With Mayo Clinic’s new Destination Medical Center (DMC), we’ve seen the local market become very competitive, with homes receiving multiple offers and often selling above asking price. With growth on the horizon, buyers in Rochester will want to be as competitive as possible, especially as all-cash sales accounted for 35 percent of transactions in February 2014, according to The National Association of REALTORS®.

“Pre-underwriting is becoming more common in Minnesota,” said Minnesota REALTORS® CEO, Christopher Galler. “Sellers are leery about pre-approved buyers. The added assurance of pre-underwriting is better for the buyer as well.”

Though not every lender offers pre-underwriting and not every buyer will qualify for pre-underwriting, it’s certainly an option to explore that can give you an edge in a competitive market.