With all the regulatory changes in the near future, it will become more important than ever for real estate agents to determine the financial strength of their buyers properly, as well as the lender’s ability to close on time.
Listing agents often ask me how to vet the buyer and his or her lender, so I put together a short list of questions I would recommend asking the lender when you receive an offer.
1. Have you verified income?
About 99 percent of the time, the prequal letter you are looking at is based on stated income, and nothing has been confirmed.
Most buyers do not know how Fannie/Freddie calculate income, and many end up providing income figures that are higher than the income the loan officer can use for qualification purposes.
A client who is prequalified using an inflated income figure could easily no longer qualify if useable income decreases.
2. Have you verified funds to close?
This one is pretty obvious, but for some reason many lenders do not verify the buyer’s assets prior to sending you a prequal letter. Save everyone a headache, and make sure the lender has verified assets before accepting an offer.
3. Has the loan been underwritten by an actual underwriter, or do you just have a preliminary approval from DU or LP?
DU and LP are Fannie and Freddie’s automated underwriting engines. Most loan officers take an application, pull credit, run DU and get an approval “subject to” verification of everything on the application.
Then they send out a prequalification letter and tell you the buyer is good to go. An approval “subject to” verification of income and assets is not a very strong approval.
The Realtors I work with know I have an actual underwriter (not just a computer underwriter such as LP or DU) review my buyers before they make offers, so there are no surprises.
4. Have you already received tax transcripts?
Tax transcripts are required on most loans, and they can take up to two weeks to receive from the IRS. If the transcripts show the buyer has not yet paid their taxes from the previous year, the buyer will be required to pay in full or set up a payment plan with the IRS.
If a payment plan is set up, the payment will have to be added to debt ratios and can affect qualification. This area is something that you need to remember to stay on top of around tax time each year.
5. Have you already received a written verification of employment?
Many homebuyers receive some bonus or commission income. The written verification of employment form breaks down bonus income from the previous two years, as well as YTD income and whether or not bonus income is likely to continue.
The underwriter uses this to determine useable income. For buyers that receive bonus or commission income, the written verification of employment is crucial. Your sale can go down the drain quickly if the buyer’s bonus or commission income is not on track to meet or exceed the previous year.
6. The contract date is X, and we have 30 days from today to close. Are you going to be able to have closing docs out in 26 days?
It is crucial to make sure your lender can close on time. Many contracts are written over the weekend, and by the time the lender has a copy of the contract, precious days have elapsed.
A good lender should be able to close in 30 days or less — regardless of the excuses they give you.
These questions should help you determine the strength of your buyers, as well as each lender’s ability to close on time. Stress to your buyers the importance of getting the lender all credit documents prior to making an offer. Because we all know nothing is worse than watching a sale evaporate the day before closing.
Tony Davis is a senior loan officer in Atlanta, Georgia. He specializes in providing purchase and refinance mortgages to homebuyers and existing homeowners, and serves as a consultant for real estate agents.
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