Buyers... Beware The Banks
Banks do not have to loan you the money you seek to purchase your new home. It is not that banks do not want to lend money to finance mortgages. It is that lenders' underwriting standards have significantly tightened. They have tightened because so many of their previous loans have defaulted, the housing crisis (which many lenders contributed so much to) triggered a nationwide and then worldwide financial crisis forcing Lenders to carefully scrutinize each prospective borrower's financial history and current financial health. They do this to substantially reduce their risk. After years of very loose lending standards, the pendulum has swung the other way.
Our Team speaks with more than a hundred new prospective buyers each month. And among the important questions we ask each caller is, "Have you spoken with a lender to see what mortgage amount you qualify for?" That question has two meanings. First, does the caller know whether their personal financial picture is clear and bright, or murky and marred by low credit scores, a recent bankruptcy or foreclosure or other credit defaults. Second, if they seem to have a pretty healthy credit history, just how much does their current financial structure indicate is an appropriate amount for a lender to provide which the Buyer can comfortably pay back each month?
When we ask that all important question, meant to help buyers begin this fundamental first step in the home buying process, we can often feel the chill it causes on the other end of the call. We know that asking the financial qualifier question means making a commitment to the home buying process some callers are not yet prepared to make. But we also know there are many aspects of the home buying process we can help buyers sort through and successfully complete, including helping them get a clear picture of their financial strength as it applies to purchasing a home.
However, even after a buyer speaks with a qualified loan officer and gets a lender's letter indicating the lender's belief in the buyer's "bankability," that does not always mean the buyer will be able to purchase a loan. That's because the over-the-phone Q & A session with a loan officer is just the very first step in qualifying for a home loan. It can trigger what is called a "Pre-Qualification" letter indicating the potential bankability of the buyer - pending receipt of a long list of documents and explanations of past financial transactions that will be required to satisfy an ever-changing and constantly narrowing of the lender's underwriter's criteria for approving a home loan. The process is detailed, lengthy and more than occasionally frustrating for everyone concerned. But it is a critical and necessary part of buying a home so here is what we recommend.
Don't just get pre-qualified, get pre-approved. Pre-approval means the lender does believe you are bankable and will likely qualify for a home loan. Here is the list of documents one of our Team's Lenders require at the start of the loan process and before you begin riding around looking for your perfect home. This information is necessary in order to help buyers know you are justifiably qualified to purchase a home and won't have to face nearly as much scrutiny in the final underwriting stages of securing a loan for your new home purchase.
1. Most recent 2 year filed tax returns
A. Confirms they have filed returns on time; if they have not they will have to file. Avoids scrambling around to get returns files before closing.
B. Uncovers side businesses which may show a loss which will lower their income and buying power. Borrowers sometimes do forget about these businesses
C. Uncovers unreimbursed business expenses even for W-2 type employees. Borrowers are sometimes "unaware" of these write offs.
D. Uncovers whether or not they are actually W-2'd or 1099'd. Someone could work for a large company and think they are W-2'd but are actually 1099'd in which case we would need a 2 year history to show how much they write off because they are considered self-employed from an underwriting stand point.
2. Most recent 2 years W-2's or 1099's.
A. Again confirms whether or not they are salaried or contract employees and confirms work history.
B. Can also verify or disprove 2 year history or bonus and overtime if we are trying to use it as income to qualify.
3. Most recent 2 months bank statements This is the biggest area of concern
A. Shows any large deposits that will need to be sourced. If the deposits are cash and cannot be sourced (95% won't be sourceable) then we may need to wait a month or 2 for the funds to "season." If the deposit was a gift we can start documenting it properly.
B. Shows if the borrower has NSF charges. A lot of these can show financial mismanagement on the part of the buyer which makes underwriters uneasy.
4. Most recent 30 days of paystubs
A. Verifies hourly pay rate and number of hours worked. Borrowers often overstate their hourly pay rate if they work a little overtime or if they are giving the co-borrowers hourly rate.
5. Two year work history
A. Must verify most recent 24 month work history and identify any gaps in employment. If recently out of work force for over 6 months, then they must be on current job for at least 6 months to qualify for an FHA loan.
All this coupled with credit scores high enough to assure the lender you have a consistent payment history for everything from credit cards to your monthly electric bill gives lenders a reasonably clear picture of your credit worthiness when seeking a home loan. And now you are "Pre-Approved."
Remember, banks do not have to loan you the money you seek to purchase your new home.
Don't forget... Selling or buying a home is a process and a journey, not an event, you will want to subscribe to our free video e-mail series for home sellers and buyers. For access to the complete series of free video and informational emails that can provide you with many of the important strategies and information you will need to make the best home selling or buying decisions you can email us at info@TMTRealtyGroup.net and ask for the SPECIAL E-MAIL SERIES REPORTS, the free no obligation series of email reports to be sent to you regularly over the next few weeks. Just put FREE VIDEO EMAIL SERIES in the subject line and let us know if want the home seller or home buyer series.
Or contact us directly for free, no obligation information at info@TMTRealtyGroup.net
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Foreclosure Asset Managers Get Tough
The New Year has brought with it a number of new negotiation points to work through for Realty Teams representing Buyers making offers on REO (foreclosed) properties. The most myopic negotiation point to date came up the other day in a multiple offer and highest and best negotiation situation one of our Team's Buyer Specialists is negotiating.
The property is a foreclosure in a pleasant sub division in Kennesaw, GA. The Investor (the actual owner of the property's note that is serviced by a Lender) invested the money to clean up and update the property. It is a great move-in condition home and perfect for the young first-time buyer hoping to close the deal on their first new home. A realistic Comparative Market Analysis was completed prior to presenting an offer to the REO listing agent for presentation to the asset manager directing the sale of the property on behalf of the Investor. The asset manager had smartly instructed the REO Agent to list the property at around 10% below fair market value. So, here is a great property at a very good price. Not an unfair tactic on the part of the asset manager, but one our Buyer Specialist was aware of when the offer was written. A multiple offer situation and a highest and best competition were expected, and the Buyers were told that the property would likely sell for around 10% above initial list price. Within days there were multiple offers.
As with all offers our Buyer Specialists present, an Appraisal Contingency exhibit was included. This is an important protection for the Buyer. It states that an appraisal will be completed within a specific number of days following binding agreement, and that if the property appraises for less than the initially agreed selling price, the Buyer has the right to ask the Seller to lower the sale price to the appraisal price. Without this exhibit, the Buyer must pay the previously agreed selling price, even if their lender will only finance a loan for the lower appraisal price. The Buyer would have to come up with the difference in order to complete the sale. The use of the Appraisal Contingency Exhibit is a commonly used, fair and necessary protection for the Buyer.
In this offer, however, the Investor steadfastly refused to accept the Appraisal Contingency stating: "The seller rejected your client's last counter. Seller will not take an appraisal contingency. Seller indicated he will not agree to appraisal/sale price adjustment.
Seller staying firm in his belief if the property is on a multiple offer situation, the buyer is willing to pay the difference.
Please note property is available to any potential buyer. We are getting too many inquiries at the present time, to include buyers that previously submitted an offer."
With the seller (Investor) refusing to accept an Appraisal Contingency, the Buyer is being placed in double jeopardy. First, if the property does appraise for less than the selling price, the Buyer will have to still pay the difference to close the sale. They will have to pay more than the property is worth and start out under water. But if they refuse to pay the difference and back out of the sale, under the terms of the agreement they will be in default and lose their earnest money deposit.
Perhaps there are some Buyer Agents that will let their Buyer take that risk. Not us though.
Buyers... Purchasing a home is an emotional experience; but it is also an important, and often, your biggest investment. In real estate you make your money when you purchase your home, not when you sell it. Buying your home for the right price at the start helps significantly in managing the home's equity value when you sell it.
As for this Investor and asset manager: Are they coy, wise, greedy, myopic? How tough is too tough before Buyers and experienced Buyer Specialists simply must move on and reject an otherwise great property?
Don't forget... Selling or buying a home is a process and a journey, not an event, you will want to subscribe to our free video e-mail series for home sellers and buyers. For access to the complete series of free video and informational emails that can provide you with many of the important strategies and information you will need to make the best home selling or buying decisions you can email us at info@TMTRealtyGroup.net and ask for the SPECIAL E-MAIL SERIES REPORTS, the free no obligation series of email reports to be sent to you regularly over the next few weeks. Just put FREE VIDEO EMAIL SERIES in the subject line and let us know if want the home seller or home buyer series.
Or contact us directly for free, no obligation information at info@TMTRealtyGroup.net
Read more posts by TMT REALTY GROUP
