By Michele Lerner
One of the most crucial elements to a sale will always be the buyer’s financing. As a REALTOR®, while you cannot guarantee a loan approval, you can smooth the path by preparing your buyer with realistic expectations of what it takes to obtain a mortgage in today’s new financial world. “One of the best things a REALTOR® can do is to recommend that their buyer sit down with a mortgage professional and get a full preapproval for a loan,” says Chip Poli, President, CEO and Founder of Poli Mortgage Group in Norwood. “Buyers need to know what they can afford before they begin to look at homes, and they need to know what to expect from the loan process. It’s a car wreck when expectations are not set properly.”
Malcolm Hollensteiner, Director of Retail Lending Sales for TD Bank in Portland, Maine, says that as confidence grows in local real estate markets and prices stabilize, lenders are more willing to make loans. However, even willing lenders need to abide by regulations and stricter guidelines for mortgage qualifications regarding documentation, down payments, and approval qualifications.
“Borrowers need to provide more documentation than in the past and need to prove their ability to afford their payments,” says Charlie Nilsen, Southern New England Area Manager for Wells Fargo Home Mortgage.
“REALTORS® need to prepare their buyers to provide lenders with everything they ask for, which includes not only W2s, paystubs and tax returns, but also documentation of all assets. We need to know if the borrowers have enough cash for the down payment and closing costs, but also where the money came from to see if it’s a gift or a loan.”
Nilsen says that lenders typically require at least two months of bank statements, but sometimes they will require a third month of statements.
Borrowers who are consolidating funds from various accounts or mixing gift money into their down payment need to keep careful records of their financial transactions for at least three months prior to a loan application.
“Sometimes clients will question why they need to provide something, but REALTORS® should tell their clients that this is almost like a parent telling a kid ‘because I said so’,” says Amy Tierce, Regional Vice President for Fairway Independent Mortgage in Needham. “Don’t question what the lender wants, just do it as quickly as possible to avoid delays.”
For first-time buyers, gathering funds for a down payment can be the biggest challenge. “It’s a myth that everyone needs 15 or 20% down to buy,” says Hollensteiner. “There are programs out there for people that have lower down payment requirements. Not only are there FHA loans that require just 3.5% down, but at TD Bank we offer a “Right Step” loan for firsttime buyers that requires only five percent down and does not require any mortgage insurance.”
Hollensteiner says many borrowers can work with a state, county, or local housing program in conjunction with the Right Step loan and purchase for as little as three percent cash, including all closing costs and down payment funds.
Scott Auen, Vice President of Mortgage Lending for Digital Federal Credit Union in Marlborough, says the Town of Worcester has a “Buy Worcester Now” program, for example, with up to 100% financing. Some of these state and local programs have income limits and loan limits.
MassHousing offers a variety of loan programs with low interest rates, some without any mortgage insurance requirement, to qualified borrowers. Nilsen says REALTORS® and lenders should ask prospective buyers about their military service, because some people are not aware they may qualify for a VA loan.
Borrowers should have a lender compare a variety of loan programs. As FHA insurance premiums have risen, many borrowers find that a conventional loan with PMI can be less costly. Wells Fargo has a “Preferred Product Option” tool available to consumers that can help them evaluate their loan choices.
“Borrowers should not be afraid of taking on a conventional loan with private mortgage insurance (PMI), because the PMI can be eliminated once they have enough home equity,” says Auen. “Also, PMI is tax deductible again for 2013.”
Mortgage Approval Qualifications
In addition to cash for a down payment and closing costs, lenders need to evaluate the overall strength of a borrower to determine eligibility for a loan. Auen says lenders look at the four “Cs”:
Collateral: down payment and property condition
Capacity: whether you can afford the payments and have cash reserves
Credit: your credit report and score will be reviewed to evaluate how likely you are to repay the loan
Character: job history
According to Ellie Mae, the average credit score for all approved loans (purchase and refinance, conventional and FHA) in 2012 was 748. The average credit score for all denied loans in 2012 was 704. For FHA purchase loans, the average credit score for approved loans was 700 and the average credit score for denied loans in 2012 was 667.
Many mortgage programs also have specific cash reserve requirements such as two or three months of mortgage principal, interest, taxes, and insurance payments.
“The debt-to-income ratio that’s pretty much the standard maximum for most lenders is 41% overall, but some borrowers can exceed that if they have compensating factors such as more cash reserves, very little payment shock from their current housing payment, or additional income that is not part of the qualifying ratio for some reason,” says Hollensteiner.
While lenders may be sympathetic to a gap in employment due to the recession and will accept a shorter job history in some cases, self-employed borrowers must have been independent contractors for at least two years. All lenders verify employment.
Approval to Closing
REALTORS® want to warn their buyers not to make any major changes to their finances between a loan approval and settlement, says Poli.
“In the old days, no one would know if you went out and bought a car or charged a bunch of furniture to your credit card,” says Poli. “Now, lenders usually will check your credit report again about three or four days before the closing.”
Tierce says if someone takes on a new car loan their mortgage will have to be underwritten again, which could take hours or even days. “It’s amazing how often this happens, but we’ve only been unable to close a loan once or twice,” says Tierce. “Some closings have been delayed, though, which creates a lot of problems for everyone involved in the transaction.”
Tierce says the impact of a change in a buyer’s finances is bigger for buyers who have a lower credit score or a higher debt-to-income ratio because they may no longer be able to qualify for a mortgage.
A verbal employment verification will also be done near the closing. “If someone has changed jobs it may be OK to close the loan depending on the loan-to -value and the debt-to-income ratio,” says Tierce. “Sometimes, though, we need to delay the closing while we wait for a paystub from the new job.”
Client Turned Down for a Loan? How to Help
Tierce recommends that REALTORS® refer their buyers to a reliable lender. She says if a buyer comes to them with a preapproval letter from an unfamiliar lender, the REALTOR® may want to ask the borrower for permission to call the lender to verify the preapproval.
Communication between the buyer, the REALTOR®, and the lender throughout the homebuying process can prevent a last-minute loan denial, but REALTORS® can also support buyers who are initially denied a mortgage.
“If buyers are turned down for a loan, the first step is to figure out why,” says Tierce. “If you can’t qualify now, a good lender can tell you how to do it in the future and look at alternative loan programs like FHA, VA, USDA and MassHousing loans. I often refer people to a community-supported program available at a specific bank or to a portfolio lender that has more flexibility and can approve someone who has a high net worth but is recently self-employed.”
In some cases, a borrower will need to pay down debt or save more for a down payment or build a stronger credit history before qualifying for a mortgage, says Hollensteiner. A REALTOR® who can recommend a reputable, reliable lender to work with borrowers will be more likely to be the chosen sales professional when prospective buyers are ready to return to the housing market.