Questions I should ask the lender that is pre-approving my buyer
When your buyer reports back to you how much the lender has pre-qualified them for, do you take that as the final answer? In my opinion you should not. Buyers don't know the questions they should ask because real estate and lending are not their businesses.
In order to make sure the amounts your buyer has been pre-qualified for has been maximized, ask the lender the following eight questions:
- What is your maximum debt ratio? What you may hear: 38 to 40 percent. What you should hear - for a conforming or high balance loan, 45%, and for a jumbo loan at least 44%.
- Do you qualify at the start rate? What you may hear: we qualify at the start rate plus two percent. What you should hear - we qualify at the start rate. Qualifying at the start rate plus two percent has a huge negative impact on the amount your buyer can qualify for.
- What loan program did you use to qualify? What you will probably hear - 30 year fixed. What you should hear - an adjustable rate mortgage (ARM) that is is fixed for the first five, seven, or ten years. My job as a lender is to educate buyers about the different types of products available, even if they say they want a thirty year fixed. Lets face it, most newlyweds who are buying their first home are not going to be there for more than ten years. Why should they pay the higher interest rate and qualify for less with a 30 year fixed rate?
- Can they pay off credit card debt to qualify for a larger loan amount? What you may hear - no, credit card payments are counted in the debt ratio even if they are paid off prior to or at the close of escrow. What you should hear - yes, if they can be paid off either prior to or at the close of escrow than they are not counted in the total debt ratio.
- Can my clients get a non-occupant co-borrower to increase the loan amount and sale price they can qualify for? What you will probably hear - no, non-occupant co-borrowers are not allowed to help qualify. What you should hear - yes, we allow non-occupant co-borrowers to help qualify.
- Do you use a percentage of their liquid assets as income to help qualify? What you will probably hear - no, we do not have a formula to use a percentage of the buyers assets as income. What you should hear - yes, we utilize a percentage of the buyers leftover assets after subtracting the down payment, closing costs, and cash reserves as assets.
- Is PMI required? What you may hear - yes, PMI is required with a down payment less than 20%. What you should hear - no PMI is required with a 5% down payment on loan amounts under the high balance loan limits (as high as $625,500). A monthly PMI payment is an added expense that will reduce the maximum loan amount.
- Do you allow an auto allowance to offset the debt of a car payment? What you will probably hear - no, we do not allow the auto allowance to offset the car payment. What you should hear - yes, we allow an auto allowance to offset the car payment.
Let's take this to a silly extreme: the lender your buyer is talking to may allow a maximum debt ratio of 38%, qualify at the start rate plus two percent, used a 30 year fixed rate to qualify, does not allow the payoff of credit card debt to qualify, does not allow a non-occupant co-borrower to help qualify, will not consider a percentage of excess liquid assets as income, requires PMI, and does not allow the buyers auto allowance to offset the debt of his car payment.
"Caulfield", you say, "this is silly, no lender is this strict!" I say back to you "COUGH bigbank COUGH bigbank"
You owe it to your clients to ask these questions of the lender they are working with. Do not take as gospel what one lender tells you without finding out how they arrived at their numbers for the maximum sale price and loan amount your client qualifies for!
Phil Caulfield NMLS #386911 APMC #1850 has been helping people obtain mortgages since 1985. The views, articles, postings, and information listed at this website are personal and do not necessarily represent the opinion or the position of American Pacific Mortgage Corporation."