I will only work with with Buyers that provide a pre-approval letter.... I don't believe that a pre-approval is their ticket to getting into a home. I view it as the Buyer's good faith effort to buying a home / property. There is more to buying a property than a pre-approval letter....
I interview the Buyer prior to working with them. I want to know if they have any of their own funds that will be applied to the transaction. If they are getting gifts from family or friends then typically the funds need a 30 day seasoning. Consequently, they neeed to know this so they can make the necessary arrangements. I inform the Buyer that they were pre-approved on their current information. If they have low FICO scores and high debt ratios they should not make any major purchases until after they close on their home. If the Buyer does not volunteer the fact that they have low FICO scores or high ratios...if the pre-approval letter has a high interest rate then that should tell you that it's a sub-prime rate. I always respect a person's desire to maintain some privacy.....I just inform all my Buyers to not make any major pruchases until after the closing. A lot of lenders will pull another credit report the day before the closing. Some Loan Officers will tell you that the lenders don't do that...if you are not sure call the lender and talk to the underwriter. (get the information straight from the horsed mouth) Some Loan Officers will tell a borrower it's ok to pull a credit report several times in a certain period of time and it will not affect FICO scores...It will decrease FICO scores...I have confirmed this with Credit Plus. If a Buyer has low FICO scores and they fall under a certain score it will have a negative impact on their borrowing power. Credit Plus is a credit reporting company and they will answer any FICO score questions or concerns. If you were to ask three Loan Officers the same questions you will probably get three very different answers. The best resources are the lender's underwriter, Credit Plus or contact Fair Isaac & Co for specific questions concerning the loan, impact of credit scores, what are credit scores respectfully.
If a Buyer has less than 10% downpayment then the max Seller Contribution is 3%. If the downmpaynent is 10% or more the Seller contribution is a max of 6%. FHA loans allow a 6% contribution with a 3% downpayment from the borrower. Then there is a list of nonallowables. The nonallowables are specific closing costs that the Buyer/Borrower are not allowed to pay. On a FHA loan there is a piggy back home improvement loan which is a good program for lender required repairs. Lenders that do FHA loans are great resources for the underwriting guidelines.
Typically FTHB don't have a lot of money to put towards the transaction. I ask the Buyer(s) do you want to pay for closing costs with your nest egg / savings or not. I always inform them that I understand that it's hard to save a few thousand dollars and we can try and have the Sellers pay for closing costs so they can keep what they have saved for reserves.
Seller contributions can be taken off the List price or added to the list price. If the seller contributions are added to the list price then that new price should be within the max loan amount that the buyer was approved for. Additionally the property needs to appraise for the increased List price or the lender might not approve the loan. To add a 3% seller contribution to the list price, divide the list price by .97 and that will result in the increased list price. To increase the list price by 6%, divide the list price by .94.
example; $100,000/.97 = $103,092.78 3% seller contribution on a List Price of $100,000
100,000/.94 = $106,382.98 6% seller contibution
A wonderful calculator that is user friendly is the Qualifier Plus. You can purchase this calculator online through a company called Calculated Industries. I can determine a Buyer's monthly payment on the spot quickly and painlessly.
Bottomline, a pre-approval letter is a Good Faith letter. It's important to interview your Buyer to understand the holistic aspect of the transaction.
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