Real Estate Financing and Investing/Why Qualify the Buyer

According to an old blues lyric, "romance without finance ain`t got a chance." So it is today with home buying. Without finance, you can`t close a sale. The point of the qualifying process is to quickly sort out buyers` needs from wants and relate their buying power to the available housing stock. It`s a valuable service the real estate professional is uniquely qualified to provide.

You've probably seen people emotionally wrapped up in the idea of buying a home, but before they could find one and buy it, they had to work out financing details -- that is, unless they were able to pay cash. How do you know whether prospective buyers can jump the financing hurdle?

The answer is by qualifying the buyer. The process usually starts with a qualifying interview soon after you`ve met the buyer. Build a rapport with the buyer during the interview that will allow you to discuss personal finances, obtain key numbers to determine whether the buyer meets current lender requirements, and gather information about the buyer`s lifestyle and housing needs. Of course, as a salesperson, you`re an expert in marketing homes, not real estate finance. You should make it clear to the buyer that you can provide information but the buyer should -- and will -- eventually consult with an expert such as a lender. If you train buyers for the mortgage loan marathon, they`ll come through in good shape.

Part of the job of getting transactions completed on behalf of sellers is knowing that the buyers you bring to the sale are qualified and only then showing them the houses you know they can afford. In today`s hot markets, the seller is more interested than ever in financing. "Seller will carry back" is appearing more often in listings in California, multiple listing services (MLSs). Sellers want their properties sold fast, and financing is essential to almost every transaction.

Build trust and Rapport
Since the mortgage menu is a full one, you have more to discuss with buyers at the qualifying session than ever before. If you can prepare your buyers to organize their finances and choose the best loan for their situation, they`ll be well on their way to a loan approval. And you`ll get a closed transaction.

Establishing rapport with buyers so that you can ask them details about their personal finances isn`t always easy, but it`s necessary. You`ll run into some buyers who are reluctant to reveal their financial situation. You tell them what a lender will ask to get a loan approved. That way, buyers understand why it`s important to provide key financial information.

Many of your buyers will be move-up buyers with equity and money to make the down payment. They`ll probably fit into the range of lender requirements. But first-time buyers may not have a clear idea of what`s affordable. Qualifying them initially will help ensure they`ll see the houses they can afford.

Ask for Key Numbers
You would want to know gross and net income for the buyer -- or for both husband and wife if they`re co-borrowers -- and get a rundown of debt payments and assets, including cash, certificates of deposit, and stocks and bonds.

Cash assets will tell you what buyers can afford for a down payment, which is a good indicator of how much house they can afford. But just make sure they`ve tapped every source of income they want to use for housing. If that`s still not enough, they may have access to funds from co-borrowers, such as parents or other relatives. Income and debt will dictate the level of monthly housing payment a buyer can handle. With this information, you can estimate how much mortgage the buyer can afford. You find out the maximum that buyers can afford on the basis of income, debt payments, and the payment-to-income ratio. Then you determine the maximum for the fixed-rate mortgage and also for a variety of adjustable-rate mortgages (ARMs).

You have to elicit key financial information quickly to get the home buying process moving.

Some Lenders Like Conformity
The reason you need the financial data is that lenders have strict requirements. Often, you`ll be working with a standard "conforming" loan and using the widely accepted lender requirements. Conforming loans are largely determined by Fannie Mae underwriting guidelines the maximum loan amount throughout most of the 90`s was $240,000. This amount is raised now to $417,000. Lenders set maximum loan amounts and limit housing expense to a certain percentage of total income and total debt. The income ratios are 28 percent for the housing ratio (payments, interest, taxes, and insurance (PITI) divided by gross monthly income) and 36 percent for the debt-to-income ratio (PITI and monthly debt divided by gross monthly income).

That`s what`s dictated by the secondary market-Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). They`re among the largest single buyers of loans, so lender adhere to their requirements.

Federal Home Loan Bank Board (FHLBB) gives you this maximum mortgage amount every year according to a formula established by law. The formula is based on the average purchase price of homes on which mortgage loans closed during October as determined by the FHLBB`s monthly national survey of home prices. It`s set to be effective January 1 every year.

A rising percentage of loans are sold to the secondary market, so lenders pay close attention to the changes in conforming loan limits.

Loan to Value: Another Key Number
Another key figure for lenders is the loan-to-value ratio. This has proved to be an accurate predictor of risk in lending. Lenders like high down payments (20 percent or more) so that the loan-to-value ratio is 80 percent or less. Those loans are safe. A 90 - 95 percent loan-to-value ratio is somewhat more risky but not impossible to get. In today`s competitive lending market, lenders vie to offer extra service to borrowers. They compete on the basis of extended loan-to-value ratios.

To cover the lender`s risk, high-risk buyers usually pay extra in the form of private mortgage insurance (PMI). If you know that borrowers will need a high loan-to-value mortgage, you can explain ahead of time that PMI costs relatively little and provides the benefits of a lower down payment, more leverage, and more money available to the borrower. Then buyers won`t be shocked at the extra payments.

Loans Matching Lifestyle
During the qualifying interview, you must deal not only with key numbers but also with the buyers` housing needs and lifestyle. Find out what they want out of housing. The length of time that buyers want to stay in a house is as important as anything else in determining the mortgage they should choose. Short-term owners will benefit from an ARM`s low rates in the early years. For some buyers, especially first-timers, it`s a matter of searching for an affordable loan. First-time buyers and those who need a high loan-to-value mortgage require more work on your part. With them, your qualifying work is even more important. Some may simply be unqualified and need more time to save for a home. But don`t rule out such buyers automatically.

Look for any special circumstances that affect financing. Is the buyer a veteran? Can he qualify for a Veterans Administration (VA) loan at below-market rates? Are there relatives who can help pay for the loan? Ask buyers about IRAs or pension plan funds that may boost their net worth and help them qualify; ask them about friends or relatives who may co-sign the loan with them.

Buyers` comfort level or risk aversion is also an important factor in the kind of financing they`ll seek. ARMs and negative amortization loans carry more risk and uncertainty for the borrower, depending on the ups and downs of interest rates. Fixed-rate loans are considered more traditional and conservative.

After You Think They're Qualified
After you've obtained the key numbers, you can do some "what if" calculations based on the buyers` lifestyle and housing needs. It`ll help you arrive at a price range that`s appropriate for them and an estimate of the maximum down payment, monthly payment, and mortgage amount they can afford.

When buyers have found a house and are ready to sign a sales contract, a lender will do the formal qualifying. If you think you have a special case on your hands or are unsure about it, you can rely on the lender sources you`ve cultivated.

Know When to Call The Lender
Although financing knowledge is becoming increasingly important to salespeople, there are limits to their expertise. Know the limits of your involvement in finance. If something goes wrong with the buyers` you`re no longer their friend who helped them buy their dream house but just the opposite. Every real estate professional knows a mortgage lender. Call the lender up and have that individual talk to buyers.

Be Open to New Techniques
You`ll need to work closely with lenders to keep up with the new mortgage programs they offer. Start out with, for instance, an intensive three- to four-hour financial seminar offered by a lender and then keep up-to-date by occasional visits with lenders. It`s a good idea to check out new lenders and their loan programs by doing a dry run through the loan applications and reading the literature. Read critically. What are the advantages? Are there any hidden costs?

There is value in establishing a close relationship with three or four reliable lenders rather than shopping around for the lowest rate. You shouldn't shop rates for a quarter of a percent difference. Instead, you are better off working with your group of lenders to place most loans though you may try new lenders for hard-to-place loans. In return for loyalty, you may get good service and sometimes even a break on the rates.

Keep On Top of Trends
If you find out all you can about the top financial options in mortgage lending in your town, you`ll provide a valuable service to buyers, assuring them of good market information. You`ll also avoid the possibility that buyer`s remorse will set in after a bad loan experience or a loan rejection.

As closely as real estate salespeople and lenders must work together today, all parties to the sale will benefit if the relationship and the transaction begin right.