Which came first, the Chicken or the Egg? - Is pre-qualifying a borrower like rocket science???

How hard it is to pre-qualify or pre-approve a borrower now than it was 2 years ago?  Some would say much harder. I would agree and disagree. Here is why....

Let's put aside the appraisal issues, the mortgage insurance issues, credit scores, and several other factors, because those would be some of the main reasons why it is harder to approve someone. I just wanted to dwell on the basics that so many seem to forget or overlook. I bring this up because Lenn Harley wrote a blog last week, Qualifying borrowers is not rocket science, which has received 200 + comments. If you haven't read this, I suggest you do.

When I asked which came first, the chicken or the egg, my basic point that I would like to make is whether a borrower should be qualified to the maximum purchase price or the payment that they feel most comfortable with. There would be many arguments that would defend both sides. But let's think about this for a moment and what Lenn Harley was trying to convey in her post.

Lenn was trying to determine a price range with those potential borrowers and not take a loan application. She was using a basic method...  Qualifying ratios and assets. It's very simple. Lenn was using 30/40 ratios, which would be 30% for the front ratio and 40% for the back ratio. The normal conventional ratios are 28/36 and for FHA loans, they are 31/43%. But let's not stop there.  Lenn wanted to know about the buyer's assets also. If one had 10% to put down, and with those ratios, qualifying the borrower would not be rocket science.  Yes, we need to check their income and credit scores do matter. Lenn has a few preferred loan officers that she works with, who would pull their credit. And Lenn has a financial sheet that she asks all borrowers to fill out, which would also question other debts that they have monthly, their monthly reoccurring debt.  All she wants to do is see if they would fit the basics, to make sure it would be worth driving them around for a day, just to get a feel for what is out there. If they didn't fit the basics, she would then advise them to get fully pre-qualified by a reputable loan officer.  I found that to be very basic and easy to understand message. Let's take the qualifying issues a little further.

Jeff Belonger's top 10 questions to almost assure a successful qualification :

  1.  How much of a mortgage payment would you be comfortable with?  A payment range, to include taxes & homeowners insurance.

  2.  Are you buying the property as a primary, 2nd home, or investment property.

  3.  Is the property a SFD, condo, duplex, tri, etc, etc?

  4.  How long have you been on your current job.

  5.  Are you hourly, salary, or self-employed.  (how are you paid - twice a month or every two weeks)

  6.  Do you pay or receive child support/separate maintenance.

  7.  Have you had any bankruptcies or foreclosures in the last 7 years.

  8.  2 part question - What are your total assets to include checking, savings, 401-k, stock options, etc, etc. And how much of this do you want to use.

  9.  Do you rent and or own - how long have you been there. Do you pay by check, cash, money order.  And have you ever been 30 days late in the last 12 months.

 10. (I do ask if they have had credit pulled in the last month or so, and if so, if they knew their credit scores) And I ask specific credit questions, relative to their payment history.

PS… and part of my interview process, I always ask my borrower’s goals. Both now, the near future, and the distant future.

What is one of my biggest problems/pet peeves in this mortgage business?  It's those individuals that claim to be both a loan officer and a realtor. Someone that can help you find a home and at the same time, do your mortgage application. This is not what Lenn Harleywas claiming to be. If you are working with someone that is doing both for you, I would highly suggest that you find someone else. I have many reasons for this and some will disagree.

What I find that so many borrowers are stuck on, fixated on??  It's that they want the best interest rate, yet they don't have a trusted loan officer that will ask them the first question that I try to ask first all the time. What payment do you feel comfortable in paying??

Summary :  Yes, we all want the best interest rate. But the best might not always be the best for you. It can certainly be a balancing act, trying to get the best of everything.  But I strongly think that we need to focus on what is good for you, and not how much of a house that you can get. I think that was the point that Lenn was trying to make. Besides, who cares if your rate is 5% or even 6%, when your payment would be $3,000. And that you could actually qualify for that $3,000 payment. But that payment is too high for you and you really wouldn't feel comfortable going over $2,000 a month. Hence why I ask the questions that I ask.

One last thing. Where do I see the major issues to why so many are denied last minute, outside the appraisal issues?   Numbers 5, 6, 7, and 10. It truly comes down to so many loan officers that don't know how to accurately calculate income and to properly read a credit report. This is my opinion, but I have closed many loans in the last 2 years that were denied last minute by other lenders due to these two issues alone.  And yes, I still got them to close. 

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For more information on FHA loans, please go to this link. The FHA Expert

For more information about the 2009 Tax Credit for First Time Homebuyers : 2009 Tax Credit

For important mortgage insight to watch for, please read : Consumers need to be aware of these Red Flags !!!!

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