what is cross qualification?
Today I want to talk about cross qualification, which is the process in which one lender verifies the work of another lender in pre approving a buyer.
Cross qualification is extremely common, and when I list homes for sale I almost always require buyers to cross qualify with the lender of my choice as a condition for an accepted offer. On the reverse, I often have to facilitate the cross qualification for my buyers when they win an offer for a home, so I’m going to go into this practice, the details as to what happens, why it happens, and what you need to know about it.
Ok so, why would this happen, this process of cross qualification? Well the market historically in Los Angeles has tended to be heavily in favor of sellers, but the contracts for real estate in California are written heavily in favor of the buyer. That means that for most houses, you’ll have lots of buyers competing where the seller has all of the leverage in the negotiation to determine the price and terms that they want, which makes sense when demand so heavily outweighs supply.
But! The moment the seller accepts an offer and proceeds with that particular buyer, that seller loses almost all their leverage. They basically have to proceed with that buyer no matter what, unless the buyer does something specifically to breach the contract, like not remove contingencies in time. But if the buyer moves forward, doing everything like they are supposed to, the seller really has no way of cancelling on them in the case of a better offer coming along.
On top of that, once a single buyer is selected, the rest of the broken hearted buyers have no choice but to put that home out of their minds, continue the search, and move on to the next one. Of course, a seller can accept a backup offer, but in very few instances is that backup offer enforceable, especially if no deposit is put down. A backup offer is pretty meaningless, all it really means is that buyer “gets the first call” if things with the current buyer go sideways. Other buyers will move on, and possibly even get into escrow on other properties by the time the seller, should something go wrong, have to go back out and hunt for another buyer to replace the current one.
Therefore, you can see how the balance of negotiation power shifts dramatically once the seller accepts an offer. It’s usually why the seller is willing to negotiate some on repairs, or even sometimes on a low appraisal: they know the alternative of going back on the market and starting the whole process over again is at best just a total pain, and at worst, they won’t get the same price and terms they did before.
Ok, so what does all this have to do with cross qualification you might ask? Many sellers will insist on their buyer of choice getting cross qualified as a condition of acceptance. That means that even if they fully sign the offer, if the buyer fails to cross qualify, that offer acceptance is invalidated since they failed this “test” if you will.
During a cross qualification, the buyer’s lender packages up all of the details of the buyer’s loan and sends all of that information to a lender that the listing agent knows very well and trusts. It’s basically like a second set of eyes on whoever did the loan approval for the buyers to make sure they did a good job, that their financials are in order, and that it is unlikely that the loan will have issues going through. It’s basically like saying, “I don’t know this buyer’s lender. Things look good from what you’ve submitted to me, but I’m going to have a professional that I know and trust take a look at everything just in case, so I’m protected”.
The buyer’s agent usually connects the two lenders and requests the cross qualification package to be sent to the listing agent’s lender of choice. If the buyer’s lender has all of their documents in order and is well organized, this process should take no more than a day or two. If the buyer’s lender doesn’t have their stuff together, they may need to request more documents from the buyer to send to the cross qualifying lender, which is usually a pretty big red flag. That’s why as a buyer, it is extremely important that your lender be completely buttoned up and quick to respond. You don’t want to be in a situation where you got the congratulations of offer acceptance but the cross qualification is taking longer than it should and the seller is already nervous at your ability to perform.
You might be asking...what does the buyer do during all this? Nothing really. This is something that happens between the two agents and the buyer’s lender and cross qualifying lender. If you’ve sent everything to your lender and they have all of your updated documents, you just need to wait for the go ahead so that the cross qualification can be completed and escrow can be opened.
So there you have it, an explanation as to exactly what cross qualification is, why it is important, and why you need to know about it whether you’re selling or buying a home. Thank you for watching, I hope you learned something about contingencies, and if you did be sure to like and subscribe, and if you found this valuable, I’d incredibly appreciate you sharing this video with someone that could benefit by connecting with me. It’s super simple, and on my website there’s a button to Book A Consultation that connects directly to my calendar.
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