How hard it is to pre-qualify or pre-approve a borrower now than it was 2 years ago? Some would say much harder. I would agree and disagree. Here is why....
Let's put aside the appraisal issues, the mortgage insurance issues, credit scores, and several other factors, because those would be some of the main reasons why it is harder to approve someone. I just wanted to dwell on the basics that so many seem to forget or overlook. I bring this up because Lenn Harley wrote a blog last week, Qualifying borrowers is not rocket science, which has received 200 + comments. If you haven't read this, I suggest you do.
When I asked which came first, the chicken or the egg, my basic point that I would like to make is whether a borrower should be qualified to the maximum purchase price or the payment that they feel most comfortable with. There would be many arguments that would defend both sides. But let's think about this for a moment and what Lenn Harley was trying to convey in her post.
Lenn was trying to determine a price range with those potential borrowers and not take a loan application. She was using a basic method... Qualifying ratios and assets. It's very simple. Lenn was using 30/40 ratios, which would be 30% for the front ratio and 40% for the back ratio. The normal conventional ratios are 28/36 and for FHA loans, they are 31/43%. But let's not stop there. Lenn wanted to know about the buyer's assets also. If one had 10% to put down, and with those ratios, qualifying the borrower would not be rocket science. Yes, we need to check their income and credit scores do matter. Lenn has a few preferred loan officers that she works with, who would pull their credit. And Lenn has a financial sheet that she asks all borrowers to fill out, which would also question other debts that they have monthly, their monthly reoccurring debt. All she wants to do is see if they would fit the basics, to make sure it would be worth driving them around for a day, just to get a feel for what is out there. If they didn't fit the basics, she would then advise them to get fully pre-qualified by a reputable loan officer. I found that to be very basic and easy to understand message. Let's take the qualifying issues a little further.
Jeff Belonger's top 10 questions to almost assure a successful qualification :
1. How much of a mortgage payment would you be comfortable with? A payment range, to include taxes & homeowners insurance.
2. Are you buying the property as a primary, 2nd home, or investment property.
3. Is the property a SFD, condo, duplex, tri, etc, etc?
4. How long have you been on your current job.
5. Are you hourly, salary, or self-employed. (how are you paid - twice a month or every two weeks)
6. Do you pay or receive child support/separate maintenance.
7. Have you had any bankruptcies or foreclosures in the last 7 years.
8. 2 part question - What are your total assets to include checking, savings, 401-k, stock options, etc, etc. And how much of this do you want to use.
9. Do you rent and or own - how long have you been there. Do you pay by check, cash, money order. And have you ever been 30 days late in the last 12 months.
10. (I do ask if they have had credit pulled in the last month or so, and if so, if they knew their credit scores) And I ask specific credit questions, relative to their payment history.
What is one of my biggest problems/pet peeves in this mortgage business? It's those individuals that claim to be both a loan officer and a realtor. Someone that can help you find a home and at the same time, do your mortgage application. This is not what Lenn Harleywas claiming to be. If you are working with someone that is doing both for you, I would highly suggest that you find someone else. I have many reasons for this and some will disagree.
What I find that so many borrowers are stuck on, fixated on?? It's that they want the best interest rate, yet they don't have a trusted loan officer that will ask them the first question that I try to ask first all the time. What payment do you feel comfortable in paying??
Summary : Yes, we all want the best interest rate. But the best might not always be the best for you. It can certainly be a balancing act, trying to get the best of everything. But I strongly think that we need to focus on what is good for you, and not how much of a house that you can get. I think that was the point that Lenn was trying to make. Besides, who cares if your rate is 5% or even 6%, when your payment would be $3,000. And that you could actually qualify for that $3,000 payment. But that payment is too high for you and you really wouldn't feel comfortable going over $2,000 a month. Hence why I ask the questions that I ask.
One last thing. Where do I see the major issues to why so many are denied last minute, outside the appraisal issues? Numbers 5, 6, 7, and 10. It truly comes down to so many loan officers that don't know how to accurately calculate income and to properly read a credit report. This is my opinion, but I have closed many loans in the last 2 years that were denied last minute by other lenders due to these two issues alone. And yes, I still got them to close.
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Thanks for your post. Good information. I think the prospective home buyers that want to wait until they find a property to be pre-qualified are sent to test our patience.
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"Yes, we all want the best interest rate. But the best might not always be the best for you."
TRUER WORDS WERE NEVER SPOKEN.
Another reason I want to determine a price range and area before referring to a specific mortgage lender is because not all mortgage companies in my area do all types of loans.
I've got one loan officer very good with USDA, but until the buyer has settled on an area, it doesn't make any sense. Many mortgage companies in my area don't do USDA loans.
I also have buyers who may be looking for fixer-uppers. Few laon officers in my area are experienced with 2-3(k) loans. So, until the buyer has settled on a home to finance upgrades, we have to be careful.
Then of course, there are a few lenders who believe that, with a VA loan, the lender fees can be deducted from the seller's closing help to the buyer. The last one will not get another loan from me.
We do what we do based on our experience. There are other reasons why I don't refer a buyer to a loan officer immediately for the "pre-qualification" but I don't want to give any more info to my competitors.
Thanks for the insight. So much to consider!
Jeff: I would still say it is harder to qualify a borrower than two years ago. I see what you said about appraisal issues, etc. The problem is there are less borrowers in the system due to lending constraints. Sure, we can do all the things you mentioned above and we should. Otherwise, it's a colossal waste of everyone's time and potentially money. I appreciate your checklist. This is as helpful to us as it is to the borrower. A knowledgeable mortgage professional will make sure a borrower is qualified before ever promising a loan can be done. Even then, a pro. is cautioning their client that it's not done until it's closed. We all should be students of our craft. As things constantly change around us, it's our job to be up-to-date with the very latest in order to know if we can help our customer now or we need to wait. Thanks again for the post!
Jeff - You're singing to the choir big guy. I go through the same process in my initial meeting with a client/prospect. I can tell in a few minutes based on their answers to my questions if there is a chance in %#!! of them getting a loan.
With the ones that are marginal, I tell them upfront what our challenges are going to be and then I tell them how we're going to accomplish these challenges. By being upfront and honest with someone from the get-go, it tends to make the process and transaction a little less frightening. USUALLY!
ROY.... . thanks.. I have no problem working with anyone, but it does upset me when a borrower finds a home and wants to make an offer, but this is the first time that they are being qualified. From my end, it doesn't make sense. Especially when you as the buyer, might find something that you love, but now realize that the payment might be too high. Do you pressure yourself to buy it, telling yourself that you can make it, when you actually have doubts? I know it happens, I hear it from buyers and other people involved. Thanks for the polite compliments.
KAREN.... well, I have some other truer words... lol or are those choice words? lol Thanks.. but I see and hear many borrowers that don't understand that a payment comes with the rate, and not just because someone offered them a little less in rate, that it will solve all of their problems. thanks
LENN.... you aren't Betty Crocker and you aren't giving out some of your secrets? lol Again, you bring up some good examples to why you do part of this yourself. It makes sense. I even know a good loan officer that can actually do every loan that you mentioned, and very well I might add. ;o) thanks for your input.
BRIDGET..... my pleasure and thanks for reblogging this.
PAUL... . I think I mentioned that in a particular way, so we wouldn't have people comment about this. Most of us know that it is harder to qualify now than it was two years ago.... but mostly in regards to appraisals and title challenges. Sure, conventional loans are much harder than just a year ago. But I didn't want to get into this Paul, hence why I made my statements that I did. I didn't want to argue the obvious, but to bring to point what most loan officers should be focusing on, that really don't.
Example... if you look at FHA loans... since 1992 to now, there isn't really much of a difference at all. Yes, many lenders have fico score requirements, but most of the other guidelines are almost the same, with a few exceptions. This wasn't to be a comparison of old and new, but about basic qualifying, that so many seem to be dropping the ball on, still... now. That to me is the basics, how to calculate income and how to read credit. You know how many credit reports that I go over with people, to find out that the previous loan officer didn't go over it in detail. There main concern was the credit scores. Many loan officers just don't know... sorry, but many will agree with me that it's a very high percentage... over 50%. I just want to educate the borrower on the truth, and not what they want to hear. One loan officer told me that with this information, that many loan officers aren't capable, that it would scare some from trying to buy. Rut row... so, we should just throw fluff out there, knowing that it will happen to some buyers, yet not make them aware of this?
Overall, I appreciate your feedback, but I purposely described the reasons that it has become harder, doing this first... to get this out of the way, knowing that some loan officers would pick on these issues. Again, that was not the purpose of my post. It's about the basics of pre-qualifying, which too me, are still prehistoric in nature. And yes, a pro will tell the borrower that it's not done until it's done... but on my end, the only thing screwing up a loan at the end, are the same exact items that I mentioned in my first paragraph. Which I think my point was missed. thanks
Jeff,
I totally agree with your point about loan officers who can't figure out debt ratio's and income numbers from tax returns. I think the 2004-2008 era will be known as the "Fat and Stupid" period of mortgage lending. With the automated underwriting findings pointing to approval on almost every proposed file, and with generous underwriting staffs, and they wonder why there were so many horrible files!
I'm also finding idiots who are telling their clients they don't qualify, because they've never taken the time to understand how a 1040 breaksdown, and which deductions that they can add back to the income. So some loans walk down the street to another broker who does understand and the idiot who turned them down is now scratching his head and wondering what the hell!
Mortgage lending isn't for dummies anymore. Those who think so should find another career.
All of the things you mention are so relevant. I also agree that what they comfortable with is more important than what they CAN borrow. I think folks should not live just to make a house payment.
Sorry...that is why I am the professional at finding them the home, and negotiating their contract, and that is why you (or hopefully any mortgage person) is the professional in helping my clients get their loan.
I'm not going to be doing ANY pre-qualifying type questions as they relate to what they want to pay, etc. There are to many variables in your end of the deal for me to stick my foot in that pond!
Thank goodness there are professionals we can rely on to, well...do their profession!
DONNE..... yes, I might be singing to the choir, but it's something that many still need to read. I just pre-qualified a client last night that was with another lender, who was given a pre-qual letter a week ago. I ran their credit and we have lack of credit and collection accounts. I also went over their assets, which al $4,000 happen to be under the mattress. Rut row... I told them what we need to do and how. They asked me why, because it's their own money. I then said with a question, "I guess the other loan officer didn't go over this part with you?" They said, yes, that is correct. I explained to them, because of their credit, that it would be about 4 months until they bought. But we would have had an assets problem. Besides, they are about $3,000 short. These people would have never made it to the closing table. This is SAD... and it's CRAP. This is mortgage 101 and someone just didn't know the basics. thanks
KARL.... . I'll be honest, I don't take the income tax returns as seriously in this post. Depending on the type of returns, this is not always as easy. And it also depends on how many times you get self-employed people. My main concern is if they know how to read a pay stub, if the borrower is paid 26 times a year or 24 times a year... that slight difference can sometimes make a big difference. Or those that use overtime on a new job less than a year old, in other cases, less than 2 years old. I had this happen to a client in Miami, FL. Gee, the deal fell apart last minute with the previous lender. I truly do think that understanding the basics is easy and doesn't take much time. All you need to do is understand income, assets, and credit. Seriously, how long does that actually take to learn? thanks for your input.
BARBARA..... I agree 110% that it should be what the borrower is comfortable with and that this should be mentioned first. I was attacked by a loan officer on here in the beginning of the year, that said I was a car salesman for asking this question first. LOL And wrote a blog about me and my methods. In my own personal opinion, we had so many loan officers qualify people to the max first, that the client wasn't really ever told their payment, just purchase price... found that house... fell in love with it, then realized the payment.... and then talked themselves into it.... thinking they could make it. My sister's friend did this last year, using someone else that made it work... not me.. and now they need to sell the house.. and now at a loss.
THOM & RAY.... . in all honesty, I am finding out that there aren't as many of these professionals though. I have talked to a few trusted loan officers, 2 of which own their own companies, and they will all agree with me that over 60% of the loan officers just don't know what they are talking about or what they are doing. It's sad and might throw egg on my profession, but it's the truth. And I am finding that it's getting worse and worse. ... not better with many of these loan officers. But for the most part, I agree with you. thanks
Jeff...since when do you share your opinions with the class?? LOL!! Seriously, good points. The other thing (which I was trying to say to Lenn in my comment to her post) is that the guidelines continue to change. While most of them are tightening up...I think that we mortgage professionals should help our Realtor partners. I think that a Realtor doing their due diligence is wise. But let's not discourage buyers when there may be an option. Good post. :)
I think your estimate of 60% not know what they are talking about is still high. I am still amazed at how many people truly should not be licensed and talking to clients. I truly think with the guidlines being so black and white now-a-days - the qualifying has gotten a lot easier - its just the population of clients fitting the box has gotten smaller.
I think your estimate of 60% not know what they are talking about is still high. I am still amazed at how many people truly should not be licensed and talking to clients. I truly think with the guidlines being so black and white now-a-days - the qualifying has gotten a lot easier - its just the population of clients fitting the box has gotten smaller.
Jeff, Excellent Bog and right on point. I've gotten to the point with customer that I have them also fax me their paystubs, W-2's and bank statements. I can't tell you how many times potential buyers not give me correct income and asset information. A pre-approval/pre-qualification is much stronger when we actually look at the documentation.
I always defer to my lender before we go shopping. There is NO point to trying to get something you can't get. Great lenders always do their due diligence prior to issuing a pre-approval lender. I would give you a whirl but you weren't licensed in NV last I checked. I am sure you are one of those great lenders who makes sure it works before issuing a letter.
Jeff,
I like your approach in asking the client how much of a mortgage payment they are comfortable with. I do the same thing and quite often that is all the client qualifies for anyways.
The Lending process is still one of the most stressful occasions in many clients' lives. This is a great way to reduce the stress of the transaction. When a client understands that they are not making big changes in their budgets, they feel better about moving forward to purchase a home.
If they are qualified for more, I do advise them of that. This also gives them an idea of what price level of homes they can consider in case their chosen price range does not have the caliber of home they desire. Most times however, they don't stray from their initial price range.
Jeff I always Pre-Qual my clients for the Realtor, prior to them showing any properties. I feel by doing this they don't waste any time in looking at properties they do not qualify to purchase .
I even go one step further and get a Approval from the lender and send that along with my pre approval letter to the Realtor and client.
Scott you are right on the money,
I have also made it a point to now getting a automated underwriting approval done before giving the go ahead. It is totally necessary these days when you're fighting to get banks to lend.
Chris Opstedal
Jeff, I hear you. How many times have you had a conversation with a self employed borrower that "made 400K per year" but neglected to mention the 390K in expenses to achieve that 400K. That is 10K in income in my book! (yikes, the Agent showed this client 38 homes in the 750K range) Agents should always confirm with his/her favorite lender that a prospect has provided income/asset documents along with pulling a credit report and performing the required due diligence.
Jeff-
Great post. As a rookie, I love reading your posts! I've learned a LOT about the loan process. I just wish you were here in Kentucky!! We've been having a dickens of a time with last minute denials, sudden "issues" and waiting FOREVER to get to closing. I've got 2 pendings right now that are at 90 and 60 days. Then 90 day just got a closing date yesterday and the 60 has no closing date in sight. It's frustrating for everyone involved! Especially when you are calling the loan officer asking for updates and get the response: "I don't know where we are-I'm just waiting to hear an update just like you!" Thank goodness it's not my buyer, but it's extremely frustrating for my sellers! I'm pretty hands on and call my buyers loan officer at least once a week to check for issues, updates and progress reports.
Great post. It sums up my philosophy it's not what you can afford, it's what you want to spend.
Excellent blog, Jeff.
I really enjoy reading your material, and it is refreshing to see people that know what they are doing.
For many many years, I have asked Question #1 and that is the most important one. What they qualify for and what they are comfortable with are almost always worlds apart.
Thanks for sharing your information with us.
Paul W. Thompson
Wells Fargo Home Mortgage
Home Loan Consultant