Ch 27 Qualifying Buyer Needs

When you pre-qualify a buyer, what are you trying to determine?

If the buyer has a need to buy, the capacity to buy, and some knowledge of the market.

Why is information about net worth important?

It gives an indication of the borrower's ability to keep up the payments on the loan in the event that the borrower would lose his or her job.

Buyers can find out how much of a loan they can qualify for in one of two ways:

Prequalification Pre-approval

What is the major difference between prequalification and preapproval?

Prequalification is an informal process that a lender or an agent can do. Preapproval is a formal process that only a lender can do and it involves an actual loan application.

How to Use the Qualifying Interview with Sellers

1. Agent: "Why are you interested in selling your home at this time?" 2. Agent: "Are you aware of the latest sales comparables in your neighborhood?"

Debt to Income Ratio

=mortgage payment per month/what client earns per month If the client earns $5,000 per month in gross monthly income and their desired new mortgage payment is $4,000 per month, then the agent can explain about how a potential 80% DTI ($4,000 / $5,000 = 80%) is much too high for lenders who prefer that borrowers qualify with back-end debt ratios closer to 35% to 50%.

Applying Income Ratios - Example

Jim and Linda Kent are buyers with these income sources. Jim works for the US Postal Service and makes an annual salary of $48,000. Linda has been selling household cleaning supplies as an independent company representative for Amway and has made about $1,500 a month for the past four years. She also has been cleaning homes for the past six months, bringing in an additional $500 a month. First let's determine which of the Kent's income would be considered stable. Obviously, Jim's salary is stable. The income from Linda's cleaning supply sales would also be considered stable, but not the housecleaning money. So we'll calculate Jim's monthly income first. $48,000 ÷ 12 = $4,000 per month Then we'll add Linda's monthly income to Jim's. $4,000 + $1,500 = $5,500 So it appears that the Kent's monthly income is $5,500. To find out the approximate maximum loan payment they would qualify for, we'll multiply their combined monthly income by 28%. $5,500 X .28 = $1,540 The maximum monthly payment the Jim and Linda could afford would be $1,540. If we figure that about 20% of that amount would be for taxes and insurance, their maximum principal and interest payment would be approximately $1,230.

Too many options

Some people simply become paralyzed when faced with a decision that forecloses all other options. This may happen with first-time homebuyers who feel they need to spend months searching for the perfect house. Even if the first house you show them is perfect, they will be suspicious of their decision-making abilities. They will bounce back and forth among the available choices without selecting any of them. The way to address this situation is to make them select the three best choices and throw away the rest. Having the other options dancing in front of them is distracting.

Relocation Buyers

We love the relocation buyers because we know they are going to buy a home and they are going to do it quickly. However, you should recognize that they will have their own set of issues. They will know nothing about the area and will need your help to decide which neighborhood is right for them. The house itself becomes almost secondary to selecting the right neighborhood. Although these buyers may be used to relocating, it is still stressful and disorienting. Their main motivation is to minimize the disruption in their lives. They have new jobs to start and new lives in a new location. Their motivation is to create normalcy as quickly as possible. The broker can help by providing them with relocation packages prior to their move. If they are flying in to search for a new home, have the relocation package at their hotel when they get there. Do something that will make them feel at home. Find out when they arrive, and call them soon after. They will appreciate a familiar voice in a strange city.

Initially Qualifying Buyers

When you first meet with a buyer, how you handle that contact is important in securing him or her as a client. One successful approach would be to: Establish a good rapport by finding some common ground. Be sincere and friendly and genuinely LISTEN to what the prospect is telling you. Find the buyer's emotional needs and address those first. Discuss practical needs last.

Income Ratios

establishes the borrower's capacity to pay by limiting the percent of gross income a borrower may spend on housing costs. Housing costs include the principal, the interest, the taxes and homeowner's insurance, and also may include some monthly assessments for mortgage insurance and utilities. Conventional loans typically require this ratio to be under 28 percent, but FHA guidelines require the income ratio to be no more than 29 percent.

2. Create Reasons Why

Agents need to really think about why their reasons for success are so strong and desired. When the reasons are valid enough, the odds of accomplishing those same goals shall rapidly increase. If the reasons are valid and substantial enough, the person may do almost anything possible to reach those goals without quitting. A valid reason for inspiring success such as so that the agent doesn't get evicted from his or her apartment unit due to lack of rent money is a truly significant reason for working as hard as possible to reach the agent's short-term goals or targets.

Income Analysis

An underwriter must do a careful analysis of the borrowers' income to determine if, in fact, the borrowers can afford the monthly payment for the property they want to buy.

Credit History

At the same time the underwriter is reviewing financial and employment information, the underwriter will also send a request for a borrower's credit reports. The credit report indicates the status of current and past accounts. The borrower's payment history is the most important part of the report.

How to Use the Qualifying Interview with Buyers

Buyers 1. Agent: "Why are you interested in buying a home at this time?" 2. Agent: "What is the total monthly mortgage payment that you are seeking?"3. Agent: "Which neighborhood or zip code region interests you the most, and what sort of home amenities do you desire?"

How does a lender determine if the buyer's income is enough to pay the loan?

By establishing an income ratio and a debt ratio.

When a lender is processing a loan, there are four critical procedures involved. The lender must:

Determine the ability of the borrower to repay the loan. Estimate the value of the property that is collateral for the loan. Research and analyze the marketability of the title. Prepare the documents necessary to approve the loan and close the transaction.

First-Time Buyers

Financial concerns Addressing the money pit phobia Too many options Panic

Addressing the money pit phobia

First-time buyers are particularly susceptible. The way to address this concern is to explain that they will have time during the inspection period to obtain all the inspections they want. You can go through the list of inspections with them and suggest they get specific inspections by roofing, foundation, and electrical contractors. Another way to address this is by suggesting the buyers negotiate for a home warranty. Many times, this will alleviate concerns about appliances.

Loan Processing

Lenders qualify buyers using what are called qualifying standards or loan underwriting standards.

Liabilities

Liabilities include everything a person owes, including credit card debt, charge accounts, student loans, car loans, other installment loans, medical bills, and outstanding taxes.

Qualifying the Property

Once the lender has determined that the borrower is qualified to receive a loan, the lender will move on to the job of qualifying the property to determine if the property is a good risk.

Prequalification

This process is informal. It can be done by a real estate agent or by a lender. A real estate agent can pre-qualify his or her buyers by meeting with them and asking a series of questions about their financial status - income, assets, debts and credit history. Once the agent has collected this information, he or she can establish the price range of homes the buyers can afford. Note: Prequalification by a lender is also an informal process in that the lender is not committing to making the loan.

Debt ratio

is calculated based on all of the monthly obligations the borrower has, including those items or payments the borrower must make for other debts. These debts could be car payments, revolving charge accounts, etc. Conventional loans usually require the debt ratio be 36 percent or lower, but FHA guidelines state the debt ratio may not be greater than 41 percent.

Client Questions for Agents

"How long have your worked as a real estate agent?" "Do you work full-time or part-time as a real estate professional?" "How many homes did you sell last year?" "Do you have any client testimonial letters that you can show me?" "How often do you communicate with your clients?" "How easy is it to reach you and what is the best way to contact you?" "Do you provide weekly or monthly reports about interest in a listed property such as Open House activity reports?" "What sort of advertising campaigns do you put together for your listed homes?"

Let's review below some of the most important steps in the goal setting process that is linked directly to the creation of a target audience and subsequent marketing plan:

1. Establish a Highly-Specific Goal 2. Create Reasons Why 3. Develop a Plan 4. Take Action 5. Manage and Adjust

5. Manage and Adjust

Agents may wish to consider keeping a daily and weekly track of their goal setting and targeted marketing efforts. This way, the agent will see firsthand how effective their market strategies are working. If the agent is spending money on marketing efforts, the agent should concentrate on whether or not he or she is receiving any calls or emails back from the prospects. If so and one deal later closes, the agent can compare what sort of cash-on-cash return that the marketing campaign generated for the agent. For example, a $500 postcard mailing campaign that later encouraged one prospect to contact the agent before later closing on a new home purchase deal that generated a $5,000 net commission to the agent was equivalent to a 1,000% cash-on-cash return (or 10 to 1). Conversely, other marketing campaigns that aren't working for a certain target audience may need to be changed partly or altogether so that the agent stays on track to reach his or her goals.

Assets

Assets can be financial, such as stocks or bonds; they can be tangible or intangible - an intangible asset would be the cash value of a life insurance policy; or they can be physical, such as jewelry, real estate, cars or furniture. Underwriters typically give more weight to assets that are liquid. Liquid assets are cash or anything that can be quickly converted to cash, such as stocks. When you are dealing with buyers who currently own a home, more than likely they will be counting on the proceeds from the sale of their current home to help finance the purchase of the new home. These proceeds are referred to as net equity. Lenders often treat the net equity of a home as a liquid asset.

Always separate the buyer's needs from his or her wants. Some of the important steps to take to qualify your prospect include the following:

Determine the buyer's needs for his or her family (number of bedrooms, number of bathrooms, finished basement, three-car garage, etc.) Determine the buyer's neighborhood needs (schools, churches, shopping, etc.) Establish the buyer's timetable (When would he or she want to take possession?) Ascertain the buyer's wants versus his or her needs. Determine the buyer's financial ability to make the initial investment and then make monthly payments. Find out if the buyer is currently renting or owns another home. Determine if others will be involved in the buyer's decision making process (i.e., parents, grandparents)

When an underwriter is looking at an applicant's income, he or she must decide:

How much of the applicant's income is stable - Income that is not stable will not be used in the calculations for ability to repay the loan. If the applicant has enough stable income to make the monthly payment.

Stable Income

Income is considered stable if it comes from a consistent and reliable source. Depending on who the employer is, the income might hold a lot of weight or not so much. For example, let's say the applicant works for the City of Louisville. Working for a city is considered to be a reliable and consistent source of income, so the underwriter is apt to give income from this source a high score. On the other hand, what if the applicant works for a new, small business that is just starting up in the area? Since the new company does not have an established track record in the area, the underwriter will probably give this income a lower score. Income is also judged on its permanence - in other words, how long it can be expected to continue.

Advantages of Pre-approval

Offers from buyers who have a pre-approval letter are much more attractive to sellers. When sellers are dealing with multiple offers, a preapproval letter might be just the thing to help make their decision, since it shows that the financing contingency will not be a problem. Most sellers' agents will specifically ask for proof of the buyer having been pre-approved. If the agent does not receive such proof, he or she may recommend that the seller not consider the offer until the seller gets notice of pre-approval. Closing goes more smoothly when buyers are preapproved. Since the evaluation of the buyers has already been done, the lender needs only to obtain an appraisal and start the title work

Pre-approval

On the other hand, pre-approval is a formal process that only a lender can do. When going through a pre-approval process, the buyers fill out a loan application and give the lender all of the same documentation that's required when applying for a loan after finding a home. The lender takes all of the information and evaluates it just as if it were a regular loan application, except that the lender will not order an appraisal or a title search (since the buyers have not yet chosen a home they want). After checking the buyers' credit and finding it to be satisfactory, the lender will set a maximum loan amount based on the financial information the buyers provided. Then the lender will issue a preapproval letter, which says the lender will lend the buyers an amount up to their maximum approved amount - as long as the property they choose meets the lender's standards. The preapproval letter typically has an expiration date of about three to four months, but the buyers could ask for an extension if needed.

Underwriting Process

Once the borrower has submitted a loan application to a lender, the actual underwriting process begins. The underwriter must evaluate the borrower's ability to repay the loan. As we said earlier, one of the principal risks a lender undertakes is the fact that the borrower might default on repayment of the loan and that the borrower will damage the value of the property as security. In addition, the lender runs the risk that, in the event of a foreclosure, the sales proceeds from the property will not be enough to cover the lender's loss. To qualify for a mortgage loan, a borrower must meet the lender's qualifications in terms of income, debt, cash, and net worth. In addition, the borrower must demonstrate sufficient creditworthiness to be an acceptable risk

Some of the most successful closing techniques include as follows:

Sum-It-All-Up-Close: While working with a buyer, the agent will restate all of the nice features in the home that the client seemed to appreciate, the seller's list price as compared with other similar properties for sale that seemed more expensive, the types of services that the agent will offer throughout the closing process, the names of the best third party inspectors and mortgage brokers, and other details. Then, the agent will attempt to close the deal by asking just one simple direct question: "Should I move ahead and draw up the purchase offer today?" A variation on the closing technique above is the Assumptive Close when the agent just acts as if the clients wants to move ahead with the deal. An example of the assumptive close is as follows: "Do you want to sign the contract now here in the office, or would you like me to come over to your place this evening to finish up the paperwork?"

1. Establish a Highly-Specific Goal

The agent must think of what his or her true main goals are for the upcoming month or year. Instead of writing "I want to be rich" on the list of goals, the agent should narrow down that goal to a certain dollar amount or income range such as to earn more than $50,000, $75,000, $100,000, or $500,000 for the year. To narrow down this annual income goal, the agent should then divide the annual amount into monthly income projections.

Lenders use loan underwriters to process the applications and decide whether to accept or reject the loan. All mortgage loans are risky for the lender. Lenders run the risk that:

The borrower will not be able to repay the loan. If the borrower defaults on the loan, the property will be worth less than what is still owed on the loan.

What risks do lenders face when making a mortgage loan?

The borrower will not be able to repay the loan. If the borrower defaults on the loan, the property will be worth less than what is still owed on the loan.

What is the most important part of a credit report?

The borrower's payment history.

Financial concerns

The buyers are probably afraid they will not qualify for a loan. The way to address this is to have them pre-qualify with a lender. If they can obtain a pre-qualification letter stating they will qualify for a loan up to $__________, then it puts the buyer back in control. They will know they CAN qualify and for how much. It takes the guesswork out of the equation for them and for you.

Define underwriting.

The evaluation process used to determine the borrower's ability to repay a loan and estimating the value of the property being used as collateral.

Underwriting

The evaluation process used to determine the borrower's ability to repay a loan and estimating the value of the property being used as collateral. will determine whether a borrower and property meet the minimum requirements established by the lender, the investor, or the secondary market (into which the lender will probably sell the loan).

Investors

The key to satisfying the investor buyers is to find out exactly what kind of property they are searching for and then find it. There are different types of investors. Some want to buy houses that need renovation and then sell them. Some want to buy rental properties. Others want a combination of these factors.

3. Develop a Plan

The only person who absolutely needs to believe that the goals will be reached and accomplished is the same person writing down the goals. It does not matter too much if friends, family, and coworkers also believe that the agent will reach his or her goals, yet agents should consider surrounding themselves with people who offer at least some basic words of encouragement instead of constant negative criticism. The agent should write down a thorough target marketing plan that may revolve around finding new buyers, sellers, developers, tenants, or landlord. The agent should then write down the specific ways to reach those customer prospects while continually thinking of new ways to modify and improve these target marketing plans.

What does the term net equity mean?

The proceeds from the sale of the buyers' current home that will be used to help finance the purchase of the new home.

Qualifying Buyers

The qualifying process you choose to put in place an essential procedure to determine if your buyer has: A need to buy The capacity to buy Some knowledge of the market Qualifying buyers is a major function of your job. But before we get into how to qualify, let's look at the types of buyers you will be dealing with.

Qualifying the property involves considering the following issues:

The type of property (residential, commercial, agricultural) Location Area zoning Value range Neighborhood Actual age/Effective age/Remaining economic life Condition (repairs and predications) Special clearances (code compliance, well and septic certifications, etc.) Overall marketability

Other Underwriting Considerations

The underwriter will examine the assets and liabilities section of the borrower's application very carefully. The information about the borrower's net worth is important to the lender as it gives an indication of the borrower's ability to keep up the payments on the loan in the event that the borrower would lose his or her job. The lender determines a borrower's net worth by subtracting liabilities from assets.

4. Take Action

There is an old saying that goes something like this one: "It is better to try and fail than not try at all. If you fail, you learn. So, you cannot fail." A written goal is worthless to the goal setter unless future action is taken. Many times, the goals set may be unrealistic at first, so the agent should adjust their strategies along the way as they learn as they go. A specific type of action that can be incredibly scary to new agents is knocking on their first door in a nearby neighborhood community when canvassing for new prospects. The most important door that an agent will probably ever knock of is their very first door. From there on out, it will probably get easier and easier after the agent learns that the homeowner may either not answer the door, politely decline their sales presentation, or will be receptive to the agent's marketing efforts, especially if they include postcards or flyers with the latest sales comparables nearby that may greatly interest the homeowner.

Panic

We have all panicked at some point in our lives. It happens when we are walking down the aisle to get married, it happens when we are plucked down in stressful situations, and it happens when we are getting ready to buy our first house. As a broker, you need to be prepared for this and expect it. You should probably even discuss it when you first start showing houses to a first-time buyer. Tell them to expect the feeling and to call you when it happens. They will appreciate having you as a lifeline and not feeling ridiculous when it happens.

The Letter

When a lender does the prequalification of the buyers, the lender will issue a prequalification letter that is very similar to a preapproval letter. Be sure both you and your buyers know the difference. As we said earlier, with prequalification the lender does not commit to the loan. So the evaluation of the buyer will not take place until after the offer is accepted and the buyers complete a formal loan application.