Lenn is SO Correct (as usual). Take the time to make sure someone CAN buy. Just because they have a letter saying everything is ok - please think about it yourself too! Read Lenn's tips.
* * * * HARD CORE REAL ESTATE TALK * * * *
AGENTS: HAVE YOU EVER HAD A CONTRACT FAIL, EVEN WITH A "LENDER'S LETTER" ? . . . . .
Not a week goes by that we don't read a blog post about a contract that fell apart due to a loan officer's last minute advice that the buyer doesn't qualify. Sometimes the contract has been accepted and the burden is then on the BUYER'S AGENT to advise the listing agent that, "SORRY, the loan officer just called and . . . . . . ."
We old timers know how to read the numbers and are not surprised by untimely qualifying issues.
Use a Financial Statement! Learn to read the numbers!!
We use a simple Financial Statement. We use a simple calculator. We look at our buyers assets and liabilities and "qualify" our buyers or buyers who write contracts on our listings.
We do not rely on loan officers to qualify. Qualifying a prospective home buyer isn't rocket science. This is a simple calculation. We're not qualifying buyers for credit and we rely on trusted loan officers to do that. We use qualifying ratios to determine price range. However, the agent needs to do two calculations. One for the ratio of mortgage payment/income and one for all debt/income.
How many times have we read ActiveRain blog posts about a contract that fell apart even though it was accepted by the seller (and listing agent) based on a "Pre-Approval" letter.
Question: Was that "pre-approval" letter based on anything more than a review of the credit report?? Hey! What about documenting the income and liabilities?
SELF EMPLOYED BUYERS ARE DIFFERENT. What do you mean, "the buyers have additional debt". What do you mean the self employed buyer has business expenses? Didn't the loan officer review the tax returns of the self employed buyer???
FRONT RATIO/BACK RATIO. We use ratios of 30% for an estimated PITI/gross monthly income and 40% for All Debt/monthly gross income.
30/40%. The concept was learned in real estate school. It is further perfected in our CE classes for Real estate finance. It's important and separates the agents who consistently have successful closings from the agents who simply write a lot of contracts.
Step 1. Provide the buyer with a Financial Statement Form.
Step 2. Run a qualifying loan amount based on 30% of Gross Monthly Income.
Step 3. Add the down payment, if any, for the estimated price range.
Step 4. Run a qualifying 40% of gross monthly income for all debt.
You can adjust the ratios based on the amount of the down payment and other factors, but these are reasonable qualifying ratios for most loan types. VA is different but these ratios will still work for basic qualifying.
If the buyer is self employed, the agent MUST base their calculations ONLY on taxable income, not gross income, as with a salaried buyer. This shouldn't be a surprise to real estate agents since we also file a Schedule C for self employed.
AVOID LAST MINUTE SURPRISES. Buyer's agents can save everyone a lot of angst by simply learning how to qualify their buyers. Seller's agents can save everyone the angst of failed contracts by simply requiring a Financial Statement with an offer and qualifying a buyer marking an offer on their listings. Don't be surprised at the last minute when the loan officer calls and advises that the buyer can't get financing.
When writing an offer, the first document is the Financial Statement handed to the buyer to complete while the agent runs an Estimated Closing Cost. Those two documents alone will determine whether or not the offer should even be made. The Financial Statement is going to give the agent information to qualify a buyer and the Estimated Buyer's Closing Costs is going to put in writing the cost to close. Often buyers are surprised by these numbers. Sure, if the buyer's have made loan application they should have received a Good Faith Estimate from the loan officer. Yet, every week we read of buyers who are "disqualified" at the last minute.
This is just good business practice. The cost of a failed contract is enormous to the buyer and seller, not to mention the agents and brokers.
Failed contracts are almost completely avoidable.
YOU MUST ASK FOR FINANCIAL INFORMATION. I've had new agents indicate that say that they couldn't ask a person how much money they make. I tell them that they are in the wrong business. Then I teach them how to qualify a buyer. It isn't rocket science.
FOR LOAN OFFICERS who believe that agents shouldn't get involved in qualifying buyers and "send the buyer to a lender first", all I can say is, when the contract fails due to a worthless "Pre-Qualified" letter, it's the agent who has to break the news to the seller's agent. We may have worked with a buyer for months and, based on a Pre-Approval letter believe that we are on firm footing to write a contract, negotiate a contract, manage inspections, prepare for settlement, etc.