iLender offers Calif. home sellers up to $3 million guaranteed if buyer falters

Lender can be a proxy on a variety of low-down payment mortgage programs.

By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | November 21, 2021

It has never been so easy to posture like a big-shot all-cash homebuyer.

Qualify and get pre-approved for a mortgage. Sign your soul away by agreeing to some stiff financial penalties if you don’t meet the lenders’ contract terms.

But with that, you can have the 800-pound mortgage money gorilla ready, willing and able to take out the seller at close of escrow. And the cost to participate is baked into your mortgage.

Who says you can’t compete with all-cash buyers because you need to go through the home-loan process? Who says a Fannie Mae 5% down payment can’t look as strong as cash on the barrelhead?

A new breed of lenders – called iLenders – has emerged. Their business plans vary, but in essence, they buy the house for you – paying cash – and then transition you into a mortgage, sometimes after the deal has closed.

Accept and Knock are two of the earliest companies offering this type of financing in the Golden State. Now there’s a new kid on the block.

Brand-new to California is Texas-based mortgage lender UpEquity, which might just level the playing for homebuyers who need a mortgage.

“The power of cash (assures the seller) the transaction will close on time, predictably and fast,” said Tim Herman, UpEquity’s CEO.

I decided to take a deeper look at this new arrival to see if this type of financing might be viable for homebuyers who need a mortgage.

Here are the basics:

1. Just like most lenders, UpEquity pre-approves the homebuyer on a specific mortgage program and loan amount before the buyer makes an offer.
2. UpEquity requires the buyer to sign its Cash Offer Agreement and Schedule 1 Addendum, outlining each party’s responsibilities and requirements based on Texas, not California, law.
3. Eligible transactions for the all-cash guarantee are owner-occupied, second homes, investment properties and 1-4 units, so long as the sales price does not exceed $3 million.
4. Conventional, FHA, VA, jumbo and non-qualified “exotic mortgages” are all in play for their all-cash offer program.
5. Buyers engage real estate professional of their choice to find the property.
6. Their agent writes an all-cash offer with UpEquity as the contracted buyer. They use the standard California residential purchase agreement, or RPA. The offer discloses the RPA will be assigned to the true buyer once the buyers’ mortgage reaches the clear-to-close status.
7. The true buyer calls the shots. It’s up to the buyer whether to wave appraisal and inspection contingencies, for example.
8. The true buyer is contractually obligated in the cash offer agreement to cover any appraisal gaps, or any lender required property repairs.
9. As part of the all-cash pre-approval, the true buyer must separately provide proof of 20% of the sales price as a reserve to cover UpEquity. For example, say the true buyer is putting 20% down on an $800,000 home, and the appraisal comes in $50,000 lower at $750,000. Then, the true buyer is obligated to cover the $50,000 gap, on top of 20% of $750,000.
10. If the true buyer isn’t ready to close on time, UpEquity completes the sale. The buyers must make mortgage payments to UpEquity until they are in a position to close.
11. UpEquity earns money by funding the loan and from secondary market capital mortgage market profits.

If the buyers try to pull a fast one by switching to another lender during escrow, UpEquity’s contract states they will pay a fee equal to 1% of the home sale’s contract value.

The UpEquity contract rightfully has other financial protections for itself should the true buyer not cooperate in getting the mortgage completed.

UpEquity asserts it offers competitive mortgage rates and fees.

Earlier this week I asked for a zero-point quote on a Fannie Mae 30-year fixed rate Los Angeles County purchase mortgage of $525,000 on a $700,000 home. This assumed the home would be owner-occupied by someone with a 740 middle FICO score.

UpEquity provided a rate of 2.625% and an APR of 2.707. After multiple requests, UpEquity would not provide the figures it used to calculate the APR other than confirming it was a zero-point loan.

I asked one of my loan processors to reverse engineer that loan using the same 2.625% rate and 2.707 APR.

She had to create roughly $7,731 in APR-defined fees to match the UpEquity mortgage rate and APR. Title insurance and appraisal charges are not part of the APR calculation.

In my experience, APR-designated fees are significantly lower than $7,731 on a $700,000 sales price and $525,000 loan.

My firm, Mortgage Grader would have charged nearly 2.25 points to offer a 30-year fixed at 2.625%.

Is this really a better mousetrap?

“I don’t see any red flags right now,” said real estate attorney Mike Hensley after reviewing the UpEquity contract and addendum.

“As long as we have a supply-demand mismatch, … this will work,” said Steven Thomas, chief economist at Reports on Housing. “At the end of the day, it is who is going to pay me (as home seller) the most money? This is like a lender with an angle.”

Freddie Mac rate news: The 30-year fixed rate averaged 3.1%, 12 booming basis points higher than 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% decrease in mortgage application volume from the previous week.

Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $625,000 loan, 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: A 30-year FHA at 2.49%, a 15-year conventional at 2.5%, a 30-year conventional at 2.99%, a 15-year conventional high-balance ($625,000 to $822,375) at 2.625%, a 30-year conventional high-balance at 3.19% and a 30-year fixed jumbo at 3.5%.

Eye catcher loan of the week: A 15-year fixed rate at 1.99% with 2 points cost.

Jeff Lazerson is a mortgage broker. He can be reached at 949-334-2424 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.

* Specific loan program availability and requirements may vary. Please get in touch with your mortgage advisor for more information.