I'm still learning the mortgage side of the business. Luckily, I work in an office where there is both Realtors and people who do loans. Efficiency, yeah!!

Anyways, what do I need from the buyer in order to find out if they qualify/pre approved for the home they want to purchase...I'm assuming that's the first step someone takes, right?

Also, how long does it take to find out this information?

First thing you want to do is have the loan officer take a basic application and review the credit report. Normally an experienced loan officer can tell you right away whether the client is approved or not by just looking at the credit report.
More complicated deals such as investment properties might take a bit longer to have pre-approved. The loan officer will probably (I hope they do this at least) send it to a few lenders to make sure that the numbers and scenario work out.

Best Wishes,

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Ali Mirdamadi
Branch Manager
Royal Financial LLC

The Loan Officer Database Forum

The Home Flipping Guide

Contributor and author to The Scotsman Guide National Magazine

ask questions and more questions. Best scenario would be a pre approval before you spend anytime with the customer. eventually you will be able to recognize serious buyers with a series of questions.

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View Port Orange Homes
Daytona Beach Condos For Sale
Daytona Beach Real Estate

I am going to try to help you here by giving you an exerpt of my Loan Officer 101 book on pre-qualifying a home buyer. You can get this package at http://LoanOfficer101.net.
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If you are advertising to home buyers, one of the questions that you may get asked is “can you pre-qualify me?” This is a 2-part question. The first part is to see if they qualify as per your lenders’ guidelines. The second part is to see if there is a home in their price range based on the maximum monthly payment they can afford.

The starting point is the borrower’s credit score, mainly the mid-score. Depending on the score, you will choose from among your broker’s various lenders. The second variable is the amount of money the prospect either has or will have by the time they are ready to buy the home. Take the amount that they will have and subtract out any minimum amount of reserves that the lender will want the home buyer to have.

Next, you need to see what is the maximum monthly payment that the borrower qualifies for. To do this, you pull credit and look for the total long-term monthly payments that show up. Then, determine the most monthly payment they can afford. To do this, take their gross monthly income, and divide it by 2. This is the most that their total monthly debt can be, including property taxes and homeowners insurance. If the prospect is comfortable with this monthly payment, then you can work backwards to come up with the maximum loan amount.

If the borrower cringes when you tell him or her what the maximum payment is that they can afford (meaning it is still too high), then ask how much can they afford per month. Whatever they tell you, multiply it by 1.25. Why? Because for most homeowners, their average marginal tax bracket is 20% - 25%. This means that they can deduct their mortgage interest (subject to IRS maximum limitations) and property taxes from their taxable income. If they get back 20%, then they can really afford 25% more than they think. (Yes, it’s 25%, not 20%. Do the math on a monthly payment of $1000. 1.25% of $1000 is $1250. Subtract 20% of $1250 and you get $1000).

When you get to a comfort level as far as a monthly payment is concerned, subtract the estimated monthly property taxes and insurance for the area where they are looking to buy. If you are clueless as to what to do here, then you need to either find yourself a real estate agent to work with, or go to a website like http://zillow.com and do some searches of various areas to get an idea of what property taxes for. You need to know what property taxes are in the various parts of your working area.

When you have an idea of property taxes and insurance, subtract that monthly amount from the maximum monthly payment the borrower can afford. Now you will get the principal and interest component. With this, and an interest rate, you can determine the maximum loan amount the borrower qualifies for.

Getting the exact rate requires that you know the LTV or the loan to purchase price. Since you don’t know exactly how much money the borrower has for the down payment (remember, he or she also has to cover closing costs), you don’t know the exact LTV. However, you can get an idea based on how much money the borrower has. If the borrower says that he or she only has $5,000, then assume it will all go to closing costs and they will need 100% financing. If they have at least enough down to cover a 10% to 20% down payment on the average price of a home in their desired area, then you can price the rate based on an average of 85% down.

Finding the Average Home Price
How do you know what the average price of a home is? Well, if you go to http://Realtor.com you can do a search in a given target area, based on a zip code or city/town and neighboring communities. You can search for their minimum requirements, such as number of bedrooms, number of bathrooms, garage, size of the property, single home, etc… Then you can select a price range.

Once you have the average price, you can get a handle of what the closing costs are. The main costs are going to be title insurance, title search, and transfer taxes. Add to that your broker’s standard fees, plus pre-paid reserves such as 5 months’ of property taxes and insurance, plus 10 days’ interest, and you have most of the closing costs, other than up front points.

Subtract out the closing costs from their available cash, and you can figure out about how much they have for a down payment. Now, knowing this, you can determine the LTV that you are looking at for the average price of the home. Knowing the LTV, you can refine the interest rate that you are using in your monthly payment calculation.

Once you get a monthly payment, ask these 2 questions – Does it fit into the lender’s DTI and is the borrower comfortable with that monthly payment? If the payment is too high, you can work backwards to come up with the maximum loan amount that the payment supports (after subtracting out taxes and insurance) and then add in the down payment money and come up with a maximum purchase price. If there is nothing in that price range, then the borrower either has to look in a different area, scale back what they want as far as amenities in the house, or come up with more cash. Or, put off making a purchase until they come up with the cash needed to afford the monthly payments.

One thing you can do if you have a real estate agent to work with is to let your prospect know that you will try to get up to a 6% seller assist to go towards closing costs. One thing that can be done is to bump up the price by 6% and then have the seller issue a 6% credit at settlement. Essentially, the buyer is financing an additional 6% of the price, but doing it within acceptable lender guidelines. This will only work if the home appraises for the full purchase price.

Keep in mind a few simple rules. On conventional loans you can only ask the seller to pay non-recurring costs, not pre-paid items or items to be paid in advance. If the buyer is putting ten percent down or more, the most the seller can contribute is six percent of the purchase price. If the buyer is putting less down, the most the seller can contribute is three percent.

On FHA loans, you can also ask the seller to pay everything. However, the buyer must have a minimum three percent investment in the property, whether that is applied toward down payment, closing costs, or pre-paid items. The three percent can be from their own pocket or a gift from a family member.

As you can see, qualifying someone to buy a home is a bit of a back and forth process. It’s somewhat of a catch-22 situation, as you can’t determine a payment without knowing the interest rate, and you don’t know the interest rate until you know the loan to value, and you won’t know the loan amount until you know what payment the borrower can handle and how much money they have for a down payment and closing costs. However, once you know the steps involved in pre-qualifying a buyer, you will easily be able to do this.

A Call to ARMs
This whole process gets a bit more complicated when you factor in option ARMs. With these programs, you have a start rate that may be as low as 1%, but the qualifying rate will be higher, perhaps 4% to 5%. This means that for DTI purposes, you have to use the higher qualifying rate, but to determine the monthly payment, you would use the 1% rate, or whatever the initial start rate is. The start rate is affected by the LTV and sometimes the borrower’s mid-score. The benefit of Option ARMs is that the qualifying rate may be 2 to 3 points less than the interest rate on a fixed mortgage. Thus, if a prospect does not qualify for a mortgage in their price range based on a fixed rate or a standard ARM, they may qualify based on the lower qualifying rate of an Option ARM.

The way I usually handle all this is to first ask the borrower where they want to buy. Then, go to http://Realtor.com and price out houses based on the amenities of the home, and see what LTV the borrower qualifies for as far as the mid-score. If the buyer is open to an option ARM program, calculate the minimum monthly payment and the qualifying payment. If the qualifying payment plus all long-term monthly payment obligations is below 50% of gross monthly income, and the buyer has the cash for whatever down payment is needed, plus closing costs, and they are comfortable with the monthly payment, you have a qualified prospect!

If a borrower’s mid-score is high enough, then they will qualify for 100% financing, meaning they only need closing cost money. However, the monthly payment may be too high for them, or they may not qualify from a DTI perspective. If they are fine making the monthly payment, but they don’t qualify from a DTI perspective, you may be asked to fudge their income so that they qualify. Remember, this happens a lot in the business, but it is illegal to do so.

Regarding 100% financing, often you can go with a single loan for 100% or an 80%/20% combination loan, where the interest rate on the two loans is different. Usually, the 1st mortgage has a lower rate than the 2nd. To compare this to the rate on a 100% single loan, take 80% of the 1st loan’s interest rate and add it to 20% of the 2nd loan’s interest to get the blended rate.

If a borrower qualifies for a discounted start rate on an option ARM, and their income is expected to increase, it is wise to promote the option ARM. With today’s home prices where they are, a 1% start rate or 2% start rate will let them get into a home that they otherwise could not afford. The annual appreciation should more than offset the negative amortization in the early years of the loan. Plus, the YSP on these programs is often higher than on fixed-rate mortgages.

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