What kind of mortgage commitment do you require?

Question

Hi all,

We have 2 properties on the market and will have a 3rd listed soon. When we get an offer, we want to make sure the buyer is qualified before we accept the offer and officially put the property under contract.

My question is - what do you ask the buyer to provide? Understanding that not all pre-approvals are the same, what are some requirements or questions I can ask to ensure that the lender has actually run a credit check, verified employment, etc? What paper do I want in my hands that will provide me a good level of assurance that they've gone through the necessary steps? Obviously, I don't want my property essentially off the market for 5 weeks before I find out they can't follow through.

Thanks in advance for the input.

Brie Schmidt · Answer

I am typically the buyer so I will give you my perspective.  For me to even think of purchasing a property with conventional financing I need so many things in order to get a loan (25% down payment, 6 months reserves, Max back end DTI of 45%) it is such a balancing act.  The first thing I do before I even see a place is call my lender.  I send him everything and give me a hard number to work with.  Because even if I have the cash for the DP my DTI may not support it.

IMO there is no point of me seeing a place if I cannot buy it.  My offers come with a prequalification with credit review and underwriting - and never once has the loan been the issue.  If the seller wanted to talk to my LO I would have no problem with it.

I also give 6% EM to show good faith - so when shit hits the fan (it always does somehow) the seller knows I am serious and has always allowed me time to get it done

Karin Crompton · Answer

Thanks, @Andreas W., good to know about your letter having similar phrasing. And I hear you about making it too hard on the buyer ... that's definitely the fine line we're walking - I don't want to make a mountain out of a molehill, but I also don't want to find out 5 weeks from now that the deal falls through over something I could have potentially found out earlier.

@Wayne Brooks, I am definitely going to work on finding a mortgage broker to use in that way. Do you get resistance from buyers on that caveat, despite it being free to them? And is that something you include in your listing, that they need to be pre-approved through your lender (at no obligation) before an offer is accepted?

Wayne Brooks · Answer

@Karin DiMauro you can ask the loan officer that did the pre approval if they got tax returns, but they can lie to you.  But, at least ask.  Better yet, we make them get pre approved with our lender, at no charge.  They don't have to use our guy, but at least from our guy we know if they have their tax returns and have submitted everything required, and employment issues were verified.

Andreas W. · Answer

@Karin

My prequal letter says pretty much the same. The loan officer writes this after checking the numbers. Only with an accepted offer will the loan be submitted to the processor and then to the underwriter. At least this is how my lender works in NC. I am curious if there are other ways. As much as I understand your notion, don't make it too hard for a potential buyer to risk his/her earnest money. While there are always other buyers, there are also other properties. Best of luck.

Karin Crompton · Answer

@Doug Smith - Exactly!! That's my hesitancy with our current offer.

Here's the extent of the preapproval letter that accompanied the offer, with me redacting specifics on the names and property address:

This seems pretty vague and no better than a pre-qual. So how hard do I push?

Doug Smith · Answer

Hi @Karin DiMauro . Before joining Castle Rock, I spent 20 years in lending. I had a large portfolio in the private client unit in Florida. I often got calls from clients asking for a "pre-approval" letter. Since I had underwriting authority, I would simply type one up quickly and shoot it over to them. The problem was I loaded it with "outs" for me...as well as my client (...pending appraisal, title, credit check, income docs, blood and urine samples, etc). I'm not really giving advice here. I'm just conveying the fact that they really aren't as binding or as hard to get as most realtors seem to think they are. Good luck!

Karin Crompton · Answer

Thanks, @Wayne Brooks - those are the kind of specifics I was after. So would most (serious) buyers have gone through those steps already, to have submitted the W-2s/tax returns? And if not, what kind of lag time would I be looking at if I asked for that to be done? We have a decent offer accompanied by a pre-approval letter from a local bank, but it doesn't specify whether any of that has been done. If it hasn't, I'm hesitant to accept the offer just yet, though I wonder whether I'm being too cautious (can you be too cautious? Probably not when it comes to this.).

Wayne Brooks · Answer

You need to get a preapproval, AND the DU (Desktop Underwriter) report.  In addition, talk to the lender and verify they actually got 2 years tax returns, Not just W-2's from 2013.  This is that time of year when borrowers will have submitted their W-2's since they hadn't filed their tax return yet.  Then, it's discovered they claimed "unreimbursed employee expenses" or some other deduction on their tax retuen that drops their income below what's required.  It's happened to me.

Karin Crompton · Answer

Thank you, @Brianna S. - I LOVE that loan status disclosure form! We don't have anything like that in our contracts here in CT. I'm going to see how I might go about including this or something similar to it in our future negotiations. I think either this type of form, and/or a mortgage broker that we use to qualify buyers would be a great way to go.

Brie Schmidt · Answer

I am in IL and we use the MLS contract 5.0 which has a "Loan Status Disclosure" on the last page which has 4 levels of qualification.  Maybe your state has something similar or you can use this?  The prequal with credit and automatic underwriting approval would be sufficient.  Most "approvals" cannot be done until the specific property numbers are run and that takes a few days.  Our guy always gives us a prequal w/ credit and underwriting after we sumbit all paperwork and writes in the max we were approved on

http://www.firstam.com/assets/title/asset-uploads/residential_contract-18153.pdf