Jul 30, 2021
I'm often asked by REALTORs how they can tell if a buyer is qualified for a home loan before they agree to show them property. While a full-fledged pre-approval by a local lender is the only way to tell for sure, there are a few questions that will lead you in the right direction if your buyer wants to see property before they consult with their lender.
It can be uncomfortable to launch into a conversation about credit or income. Those aren't topics we typically discuss at dinner parties. So I always start the conversation with, "Do you mind if I ask you a few questions to point us in the right direction?"
1. Then I'll begin with, "how's your credit?" People who have good credit know they have good credit. People with good credit will usually say, "Great! My score was 750 the last time I checked on Credit Karma." Or "I think it's pretty good. I haven't checked in a while but I bought a car six months ago and they said it was fine. I always pay my bills on time." If you get anything other than an enthusiastic, "my credit is awesome!" ask probing questions:
"Why do you think you have bad credit?"
"Do you pay your bills on time?"
"Have you had a bankruptcy, foreclosure or short sale?"
This is going to be a tough one to diagnose. If someone has a few collections, a handful of late payments, and a 680 credit score, we can probably get them a mortgage. But if they have a 400 credit score, they had a foreclosure last year, and they've never paid anything on time in their life, there's nothing we can do for them.
So don't use this question to exclude people completely (unless they really do tell you they have a 400 credit score and they've never paid anything on time in their lives). Instead, use this question as a barometer. If it sounds like they have great credit, show them property. If it sounds like they might have anything less than stellar credit, have them talk to me first.
2. Next question: "What's the maximum mortgage payment you're comfortable with?" coupled with, "How much do you have for a down payment?" This is going to tell you whether or not they can afford a home in our market. If they tell you, "I don't want to pay more than $1,200/month and I have $10,000 saved for a down payment," they probably can't afford to buy a home in Jefferson County, WA. Without a substantial down payment, they'll need to be able to afford $1,800-2,000/month in order to afford a $300,000+ home.
If they don't know how much they can afford, ask, "How much are you paying in rent/mortgage right now? Is that comfortable or are you struggling? Could you comfortably pay a little more?"
Buyers don't actually need a huge down payment. There are plenty of options for no/low down payments. But if they don't have a huge down payment and they only want to spend $1,500/month, it's going to be extremely difficult for them to compete in this market.
Again, use this as a barometer. Maybe they only want to pay $1,500/month but they have the ability to pay $2,000/month. And once they've sat down with a lender and looked at all their options, they'll realize they're going to have to get comfortable with a higher payment. But make sure they have realistic expectations before showing them property.
3. Next question: "What kind of work do you do?" coupled with, "Has your income or employment changed because of COVID?" This is especially important right now. Many people don't realize they can't use unemployment income to qualify for a mortgage. Potential red flags:
- They've been laid off, furloughed or are otherwise currently collecting unemployment income.
- They've been self-employed for less than a year.
- They work "under the table" and don't report their income.
Many people who are retired will report that they have no income. They may not have wages, but they do have income. Social security, pensions, and money in investment/retirement accounts can all be considered income.
Use each of these questions as a yardstick to determine whether or not you need additional information. The last thing you want to do is turn someone away who might actually be able to buy a home. If they're unemployed, they might have a co-signer. If their credit needs work, we can send them to credit counseling. If they only want to pay $1,500/month and they actually qualify for more, you can find them a home with an ADU.
But you can use these questions to gauge how much effort you put into buyers at the very beginning of the process. If you don't get the answers you're hoping for, make sure they talk to a lender before you show them property.