As a realtor, you know the importance of finding the perfect home for your clients. But before you embark on a whirlwind tour of listings, it's crucial to assess their mortgage readiness. Here are three simple questions that can quickly gauge a client's potential loan qualification:
1. What is Your Credit Score Looking Like?
Why It Matters: Each mortgage program has minimum credit score requirements. This is because lenders use credit scores to assess the likelihood of a borrower repaying their loan. A higher credit score indicates a strong history of managing debt responsibly, making you a more attractive borrower in the eyes of lenders.
Conventional loans typically require a minimum of 620, while government loans like FHA and VA may allow slightly lower scores depending on the lender's overlays (additional guidelines they impose on top of baseline requirements)
The Sweet Spot: Aim for clients with scores above 640. This opens doors to a wider range of loan options, including conventional loans with potentially better interest rates and down payment assistance programs that can ease the financial burden for first-time homebuyers.
Your Value Here: Don't dismiss clients with lower scores! Here's how you can be a valuable resource:
Credit Education: Explain how credit simulators and free credit rescore services can help them understand areas for improvement and take concrete steps to boost their scores.
Targeted Resources: Partner with lenders who offer these tools and guide clients towards achieving their homeownership goals.
2. Have you had a steady stream of income for the Past Two Years?
Why It Matters: Lenders rely on proof of income to determine how much home you can afford. They want to ensure your income is stable and sufficient to cover your monthly mortgage payment on top of your other living expenses. Most mortgage programs require proof of income for at least the past two years.
Exceptions may exist for clients with exceptional credit or those applying for specific loans like DSCR loans (for rental property investors) that use alternative qualifying metrics. Generally, lenders prefer a history of stable employment with minimal gaps. Here's what you should look for:
Income Verification: W-2s, rental income documentation, and self-employment income verification are common requirements. Be prepared to gather these documents for your clients when moving forward with the pre-approval process.
Additional Income Streams: Social Security, disability income, veteran benefits, child support, alimony, and pensions can contribute to qualifying ratios. Understanding all your client's income sources helps paint a more accurate picture of their financial situation.
Debt-to-Income Ratio (DTI): This metric is like a financial fitness score for potential borrowers. It compares your monthly debt obligations (including housing costs, car payments, student loans, etc.) to your gross monthly income. A lower DTI ratio indicates a borrower has more wiggle room in their budget to handle a mortgage payment. Understanding a client's income allows you to estimate this ratio and manage their expectations for the loan amount they may qualify for.
3. Do You Have Some Savings for the Down Payment and Closing Costs?
Why It Matters: Buying a home involves expenses beyond the purchase price. Here's a breakdown to consider:
Down Payment: For first-time homebuyers, the minimum down payment is typically 3%. Repeat buyers may need 5% for primary residences, 10% for second homes, and 15-25% for investment properties. A larger down payment reduces the amount you need to borrow and can lead to a lower monthly payment and potentially better interest rates.
Closing Costs: These can range from 3-4% of the purchase price, on top of the down payment. These fees cover various closing expenses such as appraisals, inspections, escrow, title insurance, and lender fees.
Shining as a Realtor: Down Payment Assistance: Explore programs that can help clients bridge the gap for down payments and even closing costs. Many states and localities offer assistance programs for first-time homebuyers, and some lenders have their own programs as well.
Negotiation Expertise: Negotiate closing cost concessions from sellers whenever possible. Even small savings can make a big difference for your clients' bottom line. Being a strong negotiator can help make homeownership more affordable for your clients.
By asking these three simple questions upfront, you can effectively assess a client's readiness and guide them towards the right resources. Remember, a well-prepared client leads to a smoother transaction for everyone involved.
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