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What Questions To Ask Lenders? Evaluating Lender Risk Before Execution

By
Real Estate Agent TX #0540728

We all hate to find out the buyer has a hidden prayer that turns out unanswered by the loan approval process.

Before execution, I always call lenders to review their approval/qualification letter to advise my client of the level of risk with a particular buyer. It's a triple purpose due diligence step to evaluate how strong the buyer is, see what has been done to pre-approve the buyer, and let the mortgage officer know their reputation is at stake.

In light of recent unanticipated delays I have decided to put together a new and approved list of questions and get more information to do a better job in evaluating loan contingency risk. We all know sometimes we have to take what we can get but absolutely no one likes surprises.

Until now, I called the lender to ask if the borrower has signed a loan application and submitted full loan documentation. I close by asking how strong the buyer is and how comfortable they are with the buyer. That last open ended question leads into many areas but also can leave out risks the lender might not be sharing. So, I put together this list and would like comments on what else should be asked, not asked, asked in a better way, and what else should be done without crossing confidentiality lines. Here it is. Follow up questions not included.

  1. Has the borrower been pre-approved or pre-qualified?
  2. Has the borrower been previously processed through your underwriting system?
  3. What are your guidelines for issuing a letter?
  4. Has the borrower completed and signed a loan application?
  5. Have you reviewed and have in possession the following documentation? Tax returns, wage statements, income and expense statements, leases and documentation of other types of income sources?
  6. Have you reviewed the borrowers bank statements and verified sources of down payment?
  7. Is the borrower self-employed?
  8. Has the borrower been coached not to make changes in their financial situation, marital status, and employment before closing?
  9. Is the borrower relying on any gifts to help with down payment and closing expenses?
  10. Have you cross-referenced income sources with income on tax returns?
  11. Have you looked at MLS to form an opinion about the likelihood of appraisal issues?
  12. Are your underwriters local and in house?
  13. Is your appraisal group in house?
  14. Would you attempt to sell your house to this borrower?

So agents, what do you do? What else should I do?

 

 

Show All Comments Sort:
David Popoff
DMK Real Estate - Darien, CT
Realtor®,SRS, Green ~ Fairfield County, Ct

This is a great reminder for selling agents to do their due diligence when it comes to presenting offers. Thanks

Dec 15, 2014 06:01 AM
Anonymous
Mike Tizzano

This is exactly why our company introduced our Protect Your Transaction assurance earlier this year. You wouldn't have to make that call because the borrower would present you with a certification from us that all of those questions have been addressed and it's backed by $10,000 to the buyer if we fail to perform on our end. The buyer also assign all or a portion of as additional earnest money

Dec 15, 2014 10:28 PM
#2
Lyn Sims
Schaumburg, IL
Real Estate Broker Retired

#10 has turned out to be a problem in 2014 with the IRS verifying the tax returns in a timely manner. I don't like nail biters.

Dec 15, 2014 11:02 PM
Kathy Fuhriman
Bear River Valley Realty - Tremonton, UT

Great list although I do not think the lenders, who are really loan originators, have a duty to review comps on the MLS to justify the purchase price and likely appraised value. That is the role of whomever in the transaction wrote up the contract.

Dec 15, 2014 11:06 PM
Ron Aguilar
Gateway Mortgage Group - Saint George, UT
Mortgage & Real Estate Advisor since 1995

Tod, the list is complete. Usually the buyer/borrower goes window shopping before they get qualified for a Mortgage. The system is not currently designed to avoid this. It's human nature to go from pictures on the internet to an open house or whatever. Now the agent suggests the buyer get approved and now the squeeze begins. I personally try to find the potential buyer before the agent which helps to avoid many problems. 

Dec 15, 2014 11:08 PM
Gene Fitzpatrick
Charlotte, NC
the Mortgage Doctor

Great questions.  I have been asked most of them over time, but never all together like that.  I don't mind providing any of the answers to my Real Estate referral partners or other professionals.  The only question I have a concern about is # 13.  Because of Dodd-Frank, most lenders have to use an appraisal management company so as not to influence an "inside" vendor.

Dec 15, 2014 11:23 PM
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

With the current process being what it is, most of what you ask should be fairly routine for Lenders ... and easily answered to.  As long as I'm not divulging anything considered personal info and violating confidentiality, I have no problem answering in generalities to the questions you offer.  Like Gene Fitzpatrick above, I think you'll find that most Lenders don't have in-house appraisals.  But having appraised for well over 20 years, I definitely do my homework regarding the property and any issues that might arise with it.

I applaud that you are actively pursuing info on your clients' behalf ... and acting pro-actively to foresee and work on issues that may crop-up with the lending in your transactions, Tod Franklin ... 

Gene

Dec 15, 2014 11:55 PM
Patrick Rapps
Cherry Creek Mortgage - Glendale, AZ
Patrick Rapps NMLS #630208

The comment "have to use an AMC..." is not quite accurate - it is just that using an AMC is the easy and cheap way for a mortgage company to deal with Dodd-Frank...the company I work for does use an internal "appraisal desk"  - a department completely separated from the production chain, which is compliant with Dodd-Frank (although more complex that that simple statement). I for one appreciate when an agent takes the time to make a call like this - it is sign that we will have as smooth a transaction as possible. The only way to get through the inherent problems that exist in real estate today is communication

Dec 16, 2014 01:36 AM
Michael Mullin
Advantage Mortgage Inc NMLS 1770599 , Originating loans in CA, OR and WA. - Bend, OR
NMLS 11911 - Loan Originator, FHA, VA, USDA, Conv

Tod, that's a good list you have going and I think with input from this group you can probably condense it down to just 3-5 questions which will get you what you really need.

 

My suggestions in their list of importance:

  • Substitute most of the "pre-approval" type questions with "has your Underwriter signed a conditional approval? Are any of the conditions deal killers?"
  • "No? Then do you have a complete loan application, credit report and Automated Underwriting report with satisfactory findings? And do you have ALL financial documents to back up the report findings?"
  • "No? What do you have? :)"

Let's not forget that the only person who can approve a loan is the Underwriter.  While things can still go wrong with a file, I think the very best due diligence you can do as an agent is to determine whether the Underwriter has reviewed the file yet, and if not how soon will that happen.

Some of the questions I feel are unnecessary (as the forgoing already takes all into account):

  • Self-employed borrowers shouldn't cause a problem
  • Gift funds shouldn't cause a problem
  • In-house Underwriting and "in-house" appraisal panels - while I understand some lenders have done a fantastic job at marketing the benefits of these features my experience as a lender is that they are irrelevant.  I too was terrified when the AMCs were created but the reality is that I have had NO issues with appraisals at all.  I realize appraisal issues do occur but it's certainly not a universal problem.  And "in-house" Underwriting or claims "we're a direct lender" are also bogus benefits.  I love my in-house bank, but there are plenty of times I use the "out-house" Underwriting department and we still close on time.

The wild card is the true character of the lender.  That is much more important than their ability to answer your questions. You could get positive replies to all of the above and still have a failed transaction. I'd hazard to guess your biggest disasters occur then the LO involved is a master at answering these questions in a positive light and then not delivering.

What's the best indicator for success? Confirm the file is conditionally approved by the Underwriter. Anythign less than that is just an educated guess.

 

Dec 16, 2014 02:42 AM
Dave Hymes
RE/MAX Gold - Placerville, CA

I like it Tod, particularly the last question. Also like the comments, all very helpful. Nothing is as irritating as having a "pre-approved" Buyer's financing fall through. If it falls through they weren't really pre-approved now were they?(unless their financial situation changed)

 

Dec 16, 2014 04:26 AM
Liane Thomas, Top Listing Agent
Professional Realty Services® - Corona, CA
Bringing you Home!

Great post! I relied on a lender recently who wrote a wonderful approval letter and it turned out he had not reviewed the taxes. Self employed borrower wrote off every dime she made.

Sadly found this out AFTER we had an accepted offer.

Dec 16, 2014 05:32 AM
Kimo Jarrett
Cyber Properties - Huntington Beach, CA
Pro Lifestyle Solutions

Great post and list of qualifying questions that agents should ask their clients to determine homeowner eligibility.

Dec 16, 2014 08:22 AM
Beth and Richard Witt
New York, NY
The best Retired Brokers !!!!

Congratulations on a well deserved featured post... Welcome to the Rain...

Dec 17, 2014 05:32 AM
Ben Yost - 303-587-4297
First Time Home Buyer, Mortgage Rates, Pre-Approval - Denver, CO
FHA, VA, Conventional - Mortgage Loans in De

I like the intent but......

Todd you covered about everything that goes against the Borrowers right to privacy per the powers to be! So, if the Lender doesn't mind getting sanctioned or a licence suspension, then I would imagine they will answer all those questions for you!

If you were the Borrower and your Lender gave out that much personal information on you- how would you feel? 

Michael #9 has it right:-)

Dec 17, 2014 06:07 AM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

These are good questions to ask and good things to know.  Generally I work pretty close with my lender partners though and I have confidence in them to do it right and alert me on any problems.

Dec 17, 2014 09:44 AM