Cash Can Be a Dirty Word

Cash may be king, but in the mortgage world it can cripple.  How so?

A recent buyer and his agent got his offer accepted, so the next step for the buyer was to get to the title company and pay his earnest money.  In short order, he walked into the title company, handed them a money order for $1000, and walked out with a receipt for his earnest money.

As designed, the earnest money deposit is supposed to be credited toward the money needed to cover the down payment and the closing costs, right?  Well, in this case, that’s $1000 that we can’t use at all because the money order was purchased with straight cash, and cash can’t be sourced.  With underwriters, sourcing is sort of a big deal.

Why would the title company take this guy’s money and give him a receipt without saying anything?  Don’t they know they just screwed everything up?  The answer is more simple than you might think: the title company did exactly what the purchase contract said they needed to do, which was to take receipt of $1000 from the buyer for his earnest money – they didn’t screw up at all.

In the end, the buyer will get his $1000 back from the title company (it doesn’t disappear down a black hole), but in the meantime, he’s going to have to find a way to come up with $1000 of sourced money to add to what he already had ready for his down payment and closing costs.  In other words, if he was going to need $10,000 overall to cover what’s required for closing on his new home, he now needs $11,000 (for a while) because the money he paid to the title company can do nothing but sit as a place holder.

While he will, in fact, get his $1000 back eventually, he’s a buyer like most of us who might have a little difficulty coming up with an extra grand in a short period of time.  It’s going to make things very interesting for him (and for us), and it may delay things for everyone involved.  That’s the reason for this cautionary tale:

More often than not, when we get the contract, the buyer has already dutifully made her or his way over to the title company to take care of the earnest money (because good agents like yourselves have fully impressed upon them how important it is that they do it immediately).  As real estate agents, when you’re in the process of impressing them, tell them that cash is NOT a good thing in this particular case – tell them to go to their local bank and have the teller withdraw the money from their account to issue a certified check.  All of that is traceable and can be sourced.  The underwriter is a happy camper.

Even in those cases when we have taken the buyer through the entire underwriting process and gotten them pre-approved (not just pre-qualified), if we tell them about what to do with the earnest money requirement when the time comes, there’s about a .1% chance they’re going to remember that piece of very important advice.  You, the agent, are right there at the right moment: please take two minutes and walk them through the process – or IMPRESS upon them how important it is that they call us BEFORE they do anything else.  Two minutes could save two weeks . . . or an entire transaction (and your paycheck).