It has never been easier to position yourself as a big cash buyer.
Qualify and get pre-approved for a mortgage. Free your soul by agreeing to heavy financial penalties if you do not meet the terms of the lenders’ contract.
But with this, you can have the gorilla of the 800 pound mortgage money ready, willing and able to get the seller out at the close of the escrow. And the cost of participation is built into your mortgage.
Who says you can’t compete with cash buyers because you have to go through the home loan process? Who said a 5% down payment from Fannie Mae couldn’t look as solid as cash on a barrel?
A new generation of lenders – called iLenders – has emerged. Their business plans vary, but in essence they buy the house for you – paying cash – and then transfer you to a mortgage, sometimes after the deal is closed.
Accept and Knock are two of the first companies to offer this type of financing in the Golden State. Now there is a new kid in the neighborhood.
New to California is the Texas-based mortgage lender UpEquity, which may well level the playing field for homebuyers who need a mortgage.
“The power of cash (assures seller) that the deal will be completed on time, predictably and quickly,” said Tim Herman, CEO of UpEquity.
I decided to dig deeper into this newcomer to see if this type of financing might be viable for homebuyers who need a mortgage.
Here are the basics:
- Much like most lenders, UpEquity pre-approves the buyer for a specific mortgage program and loan amount before the buyer makes an offer.
- UpEquity requires the buyer to sign their Cash Offer Agreement and Schedule 1 Addendum, outlining the responsibilities and requirements of each party according to Texas law, not California law.
- Transactions eligible for cash collateral are owner-occupied second homes, investment properties, and units 1-4, provided the sale price does not exceed $ 3 million.
- Conventional, FHA, VA, jumbo and unqualified “exotic mortgages” are all at stake for their cash offer program.
- Buyers hire the real estate professional of their choice to find the property.
- Their agent drafts an all-cash offer with UpEquity as the contract buyer. They use the California Standard Home Purchase Agreement, or RPA. The offer indicates that the RPA will be allocated to the actual buyer once the buyer’s mortgage has reached closing status.
- The real buyer takes the lead. It is up to the buyer to waive, for example, the contingencies of evaluation and inspection.
- The actual buyer is contractually obligated in the cash offer agreement to cover any valuation discrepancies or any property repairs required by the lender.
- As part of the all-cash pre-approval, the actual buyer must separately provide proof of 20% of the sale price as a reserve to cover UpEquity. For example, let’s say the real buyer puts 20% less on a $ 800,000 home and the appraisal is $ 50,000 to $ 750,000 lower. Then the real buyer is obligated to cover the spread of $ 50,000 plus 20% of $ 750,000.
- If the real buyer is not ready to close on time, UpEquity finalizes the sale. Buyers must make mortgage payments to UpEquity until they are able to close.
- UpEquity makes money by financing the loan and from the profits of the secondary market capital mortgage market.
If buyers try to pull off a quick one by switching to another lender during escrow, UpEquity’s contract states that they will pay a fee equal to 1% of the contract’s value of selling the house.
The UpEquity contract rightfully has other financial protections for itself if the real buyer does not cooperate in securing the mortgage.
UpEquity claims to offer competitive mortgage rates and fees.
Earlier this week, I requested a zero point quote on a 30-year fixed-rate purchase mortgage in Fannie Mae Los Angeles County for $ 525,000 on a $ 700,000 house. This assumed that the house would be owner occupied with an average FICO score of 740.
UpEquity provided a rate of 2.625% and an APR of 2.707. After several inquiries, UpEquity did not provide the numbers used to calculate the APR other than to confirm that it was a zero point loan.
I had one of my loan processors reverse engineer this loan using the same rate of 2.625% and an APR of 2.707.
She must have created about $ 7,731 in APR-defined fees to match the UpEquity mortgage rate and APR. Title insurance and valuation fees are not part of the APR calculation.
In my experience, the fees designated by APR are significantly less than $ 7,731 on a sale price of $ 700,000 and a loan of $ 525,000.
My firm, Mortgage Grader, would have charged almost 2.25 points to offer a 30-year set at 2.625%.
Is it really a better mousetrap?
“I don’t see any red flags at this time,” real estate attorney Mike Hensley said after reviewing the contract and the UpEquity endorsement.
“As long as we have a mismatch between supply and demand,… it will work,” said Steven Thomas, chief economist at Reports on Housing. “At the end of the day, who’s going to pay me (as a door-to-door salesperson) the most money? It’s like a lender with an angle.
Freddie Mac Rate News: The 30-year fixed rate averaged 3.1%, a booming 12 basis points from last week. The 15-year fixed rate averaged 2.39%, 11 basis points higher than last week.
The Mortgage Bankers Association reported a 2.8% drop in mortgage application volume from the previous week.
At the end of the line : Assuming a borrower gets the 30-year average fixed rate on a compliant loan of $ 625,000, last year’s payment was $ 127 less than this week’s payment of $ 2,669.
What I see: Locally, well-qualified borrowers can get the following fixed rate mortgages without points: 30-year FHA at 2.49%, 15-year conventional at 2.5%, 30-year conventional at 2.99% , a conventional 15-year high-balance ($ 625,000 to $ 822,375) at 2.625%, a conventional 30-year high-balance at 3.19% and a fixed 30-year jumbo at 3.5%.
Eye-catcher loan of the week: A fixed rate over 15 years at 1.99% with a cost of 2 points.
Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or [email protected] Its website is www.mortgagegrader.com.