Use This Little Known Trick to Make a Non-Contingent Offer!

If you haven’t noticed, we are in the middle of a very hot seller’s market. The 2020 pandemic caused thousands of home sellers to pull their home offers off the market, fearful of strangers entering their homes. At the start of the pandemic, 1.49 million existing homes were on the market for sale. A whole year later, that number dropped to just over 1 million. Combine the lack of homes with lower interest rates and a whole new perspective on what we want out of our living space, and the demand for housing went through the proverbial roof.

If you are just now dipping your toes into the homebuyer market, you most likely have no clue what to expect. You will not get your offer excepted unless you have a strategy in place. It’s why the most important thing you can do is get pre-approved by your lender (and I mean fully approved by an underwriter) and trust your real estate agent to advise you on current market conditions. If you take shortcuts, you will only end up wasting your time and will get your heart crushed when your offer is not even in the running.

Remember that sellers love clean offers with limited contingencies or none at all. And since contingent offers are usually a safeguard for buyers, they are not conducive in a hot seller’s market. In the eyes of the seller, one contingency that will most definitely disqualify a buyer’s offer is a Home Sale Contingency: when you tell a seller, you can only buy their home after you sell yours. Thus, making the purchase of their home contingent on selling your home first. They will quickly discount your offer and move on to the next. Secret tip of the day – RECASTING!

What Is Recasting?

Most buyers know they can make additional payments above their required monthly mortgage payment if they want to pay off their mortgage sooner. This is a common strategy to accelerate one’s freedom point or the moment they pay off their mortgage in full. Making an additional mortgage payment, say $250, will decrease your loan balance, but your monthly payment will stay the same. The term of your loan is reduced, but again, this does not affect your monthly payment.

Also, recasting is not something all banks will offer, so be sure to ask your lender if they provide this service. Recasting is also not a refinance as it will not change your loan terms or interest rate – instead, it will simply lower your monthly payment based on the newly reduced mortgage balance.

Let’s look at an example. Let’s assume that dream home of yours was just listed for $650,000, and you want to pounce. Figure you can sell your home and get $200,000 in net proceeds. But, you now understand your offer to buy that dream home of yours won’t happen if you make a contingent offer by telling the seller you have to sell your home first.

Your lender approves you with a $585,000 loan, putting 10% down on a 30 year fixed mortgage. Remember, you still must qualify to carry two mortgages; your current primary, if you have a mortgage in place, and the new mortgage. This is a short-term endeavor in this market, as you will sell your home right after you close on this dream home.

After you sell your home, you will take the $200,000 in proceeds and recast your new mortgage; thus, your $585,000 loan will be reduced by $200,000 to a new loan balance of $385,000. Your interest rate and term of the loan do not change, and your monthly payment is reduced based on the new, lower balance. This is not a refinance where you incur fees, and you can lower your monthly obligation to a more manageable place.

Key Take-aways:

1. Recasting is just one of a few tactics to improve your chances of getting your offer accepted, and there are more, so please reach out to your trusted lender to learn more.
2. Not all lenders offer to recast, so be sure to ask upfront before completing an application.
3. Not all loan types are eligible for recasting, so be sure to ask your lender.
4. Even if your mortgage is eligible to recast, it may still not be the best fit for your unique financial circumstances. For example, I had a client put 50% of their proceeds into the recasting process and split the rest between a reserve safety net account and paying off some high-interest debt.
5. Refinancing might make sense. The main perk of recasting is to lower your monthly obligation; however, maybe your credit scores are better by the time you recast, and rates have come down. In this case, refinancing might make more sense.