Consult a Loan Officer Before You Make a Purchase Offer

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I don't know how many people have told me the story of the Purchase Offer That Was Accepted But Couldn't Be Done. They come to me because they lost their deposit or are about to and they want some way to make it not happen.

But it's never happened to offers I write for my buyer clients. I doubt it ever will. There are many reasons why real estate agents need to know and understand loans. First off, to save their backside. Somebody defaults on a purchase money loan, the agent is an obvious target to drag in. E&O insurance plus fiduciary responsibility equals rewarding target for lawsuit. The second reason is even more important than that: Saving the client relationship. What could possibly be more damaging for a buyer's agent than losing a client's deposit? There really isn't much. When I write a purchase offer, the built in structure is always of a loan I know that I can do.

This is particularly important where there's less than 20% down payment being contemplated. For about ten years, there was pretty much always been a loan that could be done, no matter how poorly qualified someone was. Many real estate agents got used to that, writing (and accepting) purchase offers essentially "in the blind" as far as the loan went. That has now gone by the wayside. Stated Income and NINA loans are no longer available as I write this. Even full documentation loans add new curlicues every week as burned investors add more and more things they won't do to the list. Even if you make plenty of money, any loan over 80% loan to value ratio has far more stringent qualifications than a few years ago, and 90% or higher loan to value ratio is very difficult unless there's government insurance involved.

All government programs - VA loans, FHA Loans, FHA Secure (not a purchase money program), Mortgage Credit Certificate, and locally based first time buyer assistance - every one of these has always required qualifying based upon full documentation of enough income to repay the loan.

Given this, you have to know if you can afford it before you make an offer. You're going to spend roughly $1000 to pay for an inspection and an appraisal as soon as you have an accepted offer, not to mention you're tying up a deposit of several thousand dollars in escrow - a deposit that's potentially "at risk" if you are unable to qualify for the loan that will allow you to purchase the property.

I know that I'm not very respectful of pre-approval, let alone pre-qualification. This is because there are no real standards for either one, and I've seen enough pieces of paper swearing a loan could be done when it in fact could not to make a fair sized bonfire. There are several reasons for this. There just isn't anything to gain personally, and everything to lose, for a loan officer to tell someone "Sorry, but you do not appear to qualify." So they issue the pre-qualification or pre-approval on hope and a prayer, because they might be able to get a loan done. You do not want this to happen to you. Even if they tell you truthfully that you need to reconsider your loan and your purchase, you are provably better off than if they string you along with messages like Think Happy Thoughts About Your Loan and you end up spending money for the appraisal, inspection, etc, and end up losing your deposit. Probably the best way to insure that this doesn't happen is to insist upon a frank discussion of what the qualification standards are, and what your limits are under those standards. If you're right at the edge of qualification standards, might I suggest you consider "pulling back" slightly? There are often bumps in the road and you don't want one bump to mean you cannot qualify.

You want to make the loan officer go over the numbers with you. Debt to Income ratio, Loan to Value ratio. Add up all of your other debt, add up the full payments for principal and interest, property taxes, and homeowner's insurance. What percentage of your verifiable monthly income (monthly average over the past two years) is that? How much do you have available to use in your bank and investment accounts? Does that cover the projected down payment and sufficient money above that for the closing costs you'll need to pay? If you need to buy the loan down with three points in order to qualify on debt to income ratio, is there still enough available to make the required down payment?

In some cases, writing the purchase offer correctly - structuring the transaction with the loan in mind - can make a difference between a loan and a purchase that can be done, and one that cannot. This is definitely the case if you are looking for a loan over eighty percent of property value. The only 100% financing available right now the the VA loan. It can be done, even in declining markets, but you have to be extremely careful to write that purchase offer in consideration of loan requirements.

If your real estate agent is a highly qualified loan officer, it's no sweat. I write every purchase offer with prospective loans in mind. If I don't know I can do the loan, I find another way to write the purchase contract so that it can be done.

The time of writing a purchase contract and worrying about the loan after acceptance is gone, and it may not return. Even for well qualified borrowers with plenty of income and down payment, it can't hurt to get a loan officer involved when making an offer. For those with marginal income and not much down payment, getting a loan officer involved before you write an offer (or accept a counter) can make the difference between a viable transaction, and one where everyone's wasting their time and money. Yes, you can potentially renegotiate a purchase contract later. Is there anyone who wants to tell me that's as good as getting it right in the first place? Do you think you might be opening the door to issues of trust between buyer and seller getting in the way on those renegotiations? Do you think that the seller might demand fresh concessions, where if it had been negotiated correctly in the first place, you would have something that's essentially the same terms as the initial contract? Not to mention time lost, delays in closing, opportunities for the entire transaction to go south? Write your offers with loans that can and cannot be done firmly in mind, and you won't need to renegotiate for the sake of the loan.

Caveat Emptor

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About this Entry

This page contains a single entry by Dan Melson published on July 21, 2014 7:00 AM.

What is Reasonable Loan Officer Compensation? was the previous entry in this blog.

Writing Real Estate Purchase Offers to Beat Higher Competing Offers is the next entry in this blog.

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