Just recently I had a prospect call me after being referred by an agent that was new to me. As a matter of fact, it was the first referral I had gotten from this agent which is always exciting. After completing the application the borrower and I started discussing the various nuances of the potential loan and I was able to very quickly inform him he was pre-qualified for a Rural Development loan and then proceeded to explain the details of the program, payment terms, etc. Somewhere during the course of our discussion we realized that I had misheard the amount he was trying to qualify for and I was informed that he wanted a $180K loan instead of the $80K that I had originally input. Talk about a dramatic turnaround to that conversation!
I'm not sure if it was due to the massive payment difference or previous experience or a combination of both but I immediately realized that we had a problem. Before I get too far in explaining what the problem was let me give you the scenario: Husband and wife borrowers, aged 23 and 19 respectively. Two years job time for him and 4 months for her. They had been living with his parents the last 9 months rent free and had only 6 months rental history prior to that at about $500 per month. Credit scores in the mid 600's for both with decent depth of credit for him but only cars and small credit cards, the wife was on only one credit card account. I only mention their age because of how age affects the amount of credit a person could have. Being young certainly has no bearing on the loan decision but it is a reference for why the credit is thin. I digress.
Here's the problem: At $80K the loan sounded spectacular to me. Two first time buyers wanting to get out there on their own and buy their first house together. A nice $500 monthly payment and total DTI in the 35% range. Makes perfect sense. When we corrected the loan amount to the $180K that he had originally said the payment jumped up to about $1100, DTI went to 47.891% which as you may know is right below the 48% cutoff for RD ratio waivers. On the surface the deal was approvable, it met all the guidelines so I should issue the pre-qual letter for what the client asked for, right?
This is where it's good to be the bad guy sometimes. Would this loan be approved with some lenders? Absolutely it would. Why not issue the pre-qualification then? I almost did to be honest with you. I'm a people pleaser at heart, that's part of the reason I'm in the business and nothing pleases a Realtor more than getting a pre-qualified buyer ready to submit an offer, especially a Realtor I want to make a great first impression on. That being said, I made the decision to do what I felt like was the right thing to do. Even if I could convince an underwriter that taking a $180K bet on a borrower with no housing payment history was a good bet I don't think I should. If either one of the borrowers were to miss even one paycheck they wouldn't be able to pay their house payment that month, not to mention that the higher the cost of the home means the higher the cost of upkeep. I don't think I could honestly argue with an underwriter on the merits of the loan because I don't believe in it myself. 
But Dio, this is America and who are you to tell someone what they can or can't buy? If they qualify then they should be able to do what they want! Yes, we are in America and they can do what they want, if they want that house bad enough they can probably find some seedy loan officer that has somehow survived the last 3 years and get the loan. I see it as a responsibility to put my clients in the best financial position possible while still achieving their goals so I took the time to counsel both the borrower and the realtor and explain the situation to them. I issued the pre-qualification for $150K but explained that even that was a risky proposition and they should stay closer to the $120K mark. I don't know a single real estate agent that enjoys working for 3 weeks on a deal only to have it die on the vine because of something that the LO should have prevented in the first place. I don't like being the bad guy but sometimes it's necessary and in the long run history will probably show that I was really being the good guy.
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