Our most recent episode of Seattle Real Estate Chat focused on real estate agents or lenders who wear two hats. Jim Reppond of Coldwell Banker Danforth and I discuss transactions where a buyers lender is also their real estate agent OR when the buyer works with the listing agent (listing agent is both sellers agent and buyers agent). Sometimes a buyer may believe the listing agent is working for them, when the listing agent may only be working for the seller. It can be a complicated situation.
Seattle Real Estate Chat: When your Real Estate Agent or Mortgage Originator “wears two hats” [Video] #SeattleREchat
I’m noticing that more listing agents are performing, what I like to call, “sniff test” to check out the lender who has prepared the preapproval letter. By the way, I think this is an excellent idea. This is especially true if the listing agent is reviewing multiple offers, which is happening more in the greater Seattle area with non-distressed homes that are desirable and priced right.
The sniff test is typically a phone call by the listing agent so they can get an idea about the mortgage originator. The listing agent should not ask personal information about the potential home buyer (such as credit scores or available funds).
When a listing agent contacts me, I know they’re sizing up:
- how quickly I returned their phone call or email
- how experienced I am at closing my clients specific mortgage program (for example, Fannie Mae Homepath, Freddie Mac Homesteps or FHA transactions)
- how long I’ve been in the mortgage industry (over 12 years at Mortgage Master Service Corporation)
- how quickly we can close by
- to learn more about our company (family owned and operated since 1976)
I’ve heard from many local real estate agents that they need to make sure the loan can actually close. Often times, a preapproval letter may not be worth more than the paper it’s written on if the mortgage originator has not done their homework with the actual preapproval. NOTE: you are NOT preapproved unless you have provided your mortgage originator your income and asset documentation.
I wrote about “investigating your preapproval letter” many years ago at Rain City Guide. The issue with preapproval letters then was probably that anybody and their brother was a mortgage originator back in 2007. Now there are far less mortgage originators however, if the mortgage originator works at a bank or credit union, they may still lack experience (they’re not required to be licensed). A licensed mortgage originator may be new to the industry as well. Some large internet mortgage companies have been hiring LO’s who can pass the national exam but still lack experience. There’s a big difference between being a good a passing exams and successfully closing loans.
While the number of mortgage originators is dramatically down, it’s still important to make sure your mortgage originator has the capability to see your transaction to closing. It may be a consideration to make sure your mortgage originator can pass a sniff test.
I’m noticing more “bidding wars” on new listings in the greater Seattle-Bellevue area. Because of the lack of non-distressed inventory and current low interest rates, multiple offers may occur driving the sales price higher than the original offered price. Sellers and listing agents may try to create an environment for a bidding war by slightly delaying the review of offers and by pricing the home either at or slighltly under what may considered “market value”.
Here are a few tips to remember should you find yourself in a possible “bidding war”.
Be prepared to provide a strong offer. Get preapproved early. This will help you know how much you qualify for and the seller will most likely require a strong preapproval letter that illustrates you are strongly qualified and that your loan will successfully close.
Determine your financial boundaries. What is the most you want to pay for the home and for your monthly mortgage payment? Bidding wars can be charged with emotion – keep your financial goals in mind.
I often will provide several preapproval letters at staggered amounts for clients when they’re getting ready to make an offer. The letters might start at their preferred offer price and go up to the limit of their financial comfort zone is (of course they have to for that amount).
Work with a reputable lender. It is not unusual for listing agents to contact the mortgage originator to confirm the preapproval letter and to do a “sniff test” of your mortgage originator. If the listing agent is comparing two offers that are essentially the same, the mortgage originator may be a deciding factor.
Consider a shorter time period for closing. Depending on the seller’s situation, for example if the home is vacant, a shorter closing might help you win the bid. Contact your mortgage originator to see what time frame they can realistically close a transaction before writing an offer for a quick close.
Don’t forget the appraisal. Regardless of what you and five other bidders are willing to pay for a home, it still needs to appraise based on what other homes like have recently sold and closed for. The seller does not have to accept a lower appraised value. Your lender will rely on the lower of the appraised value or sales price for your mortgage scenario.
Making a non-contingent offer. Sometimes a real estate agent may suggest that you need to make an offer “non-contingent”. Consider how much earnest money you’re willing to lose if something happens where you elect not to proceed with your transaction (for example, if your appraisal comes in lower than the sales price and you’ve waived your financing contingency). NOTE: making an offer non-contingent on financing may be less risky depending on your personal scenario.
Be prepared to do your home inspection prior to making an offer. It’s not unusal for greater Seattle area homes that are preparing a bidding war to request inspections be done prior to your offer. This will also help you make your offer “less contingent” it’s not subject to an inspection.
Being as prepared as possible may help give you an advantage over other offers. The sellers and listing agent wants to be assured that what ever transaction they select in a multiple offer situation has the best odds of successfully closing.
I am happy to assist you with your preapproval and financing of your next home located anywhere in Washington state. I have been originating mortgages, including conventional, FHA and VA at family owned and operated Mortgage Master Service Corporation since April 2000. We are a well respected correspondent lender established in 1976 by the Porter family.
If you’re considering buying a home, many real estate agents and/or sellers will require a preapproval letter. A preapproval letter is different than being “prequalified”. Being prequalifed means that you have provided verbal information to a mortgage originator to get an idea of what you qualify for. Being preapproved means that you are providing documentation that supports the information you have provided. Income, employment, assets and credit are verified for a preapproval.
Some preapproval letters aren’t worth the paper they’re written on. Especially if the mortgage originator you’re working with does not require supporting documentation before preparing the letter. If you have not provided supporting documentation (listed below) to your mortgage originator – you’re probably just prequalified and not actually preapproved.
Here is a list of documents you may be required to provide in order to obtain a preapproval:
As a lender, is it ethical to deny someone for a loan and then turn around and share not only that the loan was denied, but the EXACT reason the loan was denied (for example: too many NSFs, large deposit in checking account, hours cut back at work, etc.) with the applicant’s realtor as well as the listing agent who in turn shares it with the sellers?
It’s flat out wrong for a mortgage originator to share someones personal and private information. Sometimes mortgage originators may feel pressured to provide extra details by a real estate agent wanting the nitty gritty and the mortgage originator must decline, or perhaps they’re trying to score some brownie points. Even with “perfect” clients, agents may want to know details that a mortgage originator cannot and should not provide due to strict laws protecting the borrowers privacy. This is a perfect example of why I have an issue with mortgage originators also acting as a home buyers real estate agent.
I encourage borrowers I’m working with to discuss their situation with their agent and vice versa. There is nothing preventing a home buyer and real estate agent from having a conversation and it’s up to the borrower/home buyer to decide how much information they want to share. However, Dear Agents, please keep in mind that the home buyer may be embarrassed about their situation or may not want you to know their privates.
A mortgage originator can share with an agent that the borrower does have verified funds to close and is approved for the mortgage based on their credit, income and employment. These items may be addressed in a preapproval letter.
Real estate gents will often call me to ask about a potential home buyer who has an offer pending. A majority of the time, it’s really a “sniff test” to make sure that I answer my phone, return calls quickly and to verify that the borrower is actually preapproved. They may try to find out if the buyer can qualify for more and I have to decline answering. Many times the buyer may qualify for more BUT the buyer wants to offer or buy less. Without instruction and permission from the borrower/buyer to reveal any of their personal information – mum is the word.
Someone recently landed on my blog by entering the phrase:
Why are so many homes not FHA approved?
It's an interesting question. I'm assuming the person doing the research on the internet is a home buyer and that they're looking at a stand-free home and not a condo…pure assumption on my point. (If it is a condo, that's another story).
I'm wondering if the person is finding that sellers are not promoting that they will accept FHA financing on their listed homes…which is a huge mistake.
FHA loan amounts in the Seattle and Bellevue area goes up to $567,500 for a single family dwelling and currently allows a down payment as low as 3.5%. FHA is also more flexible with credit and some underwriting guidelines.
FHA loans are more popular than ever with the ever tightening guidelines and risk based pricing that conventional loans have. Many of my FHA home buyers are putting down more than the minimum required investment of 3.5%.
Some might be selecting FHA for their purchase because they're converting their existing home to a rental property and FHA does not have the same reserves conventional guideline requiring 6 months of mortgage payments (PITI) for EACH property owned (or buying) if the converted home has less than 30% equity (which is often the motivation for turning the home into a rental).
Some select FHA financing because they plan on selling their home in the future and are hedging that mortgage interest rates will be higher in the future. They know that their current low rate FHA mortgage may be assumable to a future buyer in a higher rate environment.
I've had well established clients opt for an FHA mortgage because FHA treats alimony payments different than conventional financing.
FHA is not the same mortgage that it was a few years ago. At the end of 2005, appraisals became more "common sense" allowing minor conditions to exist, focusing more on the safety and soundness of the property. FHA appraisals are very similar to conventional these days.
FHA transactions do not take longer to close nor are their higher closing cost for the seller than a conforming loan
My point is, there are many reasons sellers should accept FHA financing. If a seller or real estate agent is steering away from an FHA approved buyer, they're really reducing the potential of excellent buyers for their home.
This isn’t the first time I’ve written about preapproval letters at The Mortgage Porter…however it has been a while and I would say that with all the changes in the mortgage industry, your preapproval letter is more important than ever. Most Seattle area real estate agents will not accept an offer on a home that’s listed for sale without a bona fide preapproval letter.
Preapproval letters may vary in appearance and content from lender to lender. Some mortgage companies may have different protocal for when a preapproval letter may be issued. When I provide a preapproval letter, it means that I have a complete loan application, most likely with exception to the property address since the home buyer has not yet identified a home. It also means that the home buyer (i.e. borrower) has provided me all the necessary documenation that supports or backs up the information that has been provided on the loan application, such as
- income documenation (to make sure they qualify for the proposed montly mortgage payment)
- assets (at minimum, enough to cover the down payment and closing costs)
- credit report…everything seems to be based on your credit score from potential interest rates to what you qualify for. This is something that we need to pull if you are interested in obtaining an actual preapproval.
A good preapproval letter should address all of these items so that the seller and the real estate agents know how qualified the home buyer is. This is done in a manner in which not to violate the buyers privacy. For example, a seller or real estate agents should not see the buyers income, assets and credit scores. If a buyer wants to share that information with someone other than their mortgage professional, it is up to them! Instead, the preapproval letter will address that these items have been reviewed and are acceptable.
For example, I might include something like this in a preapproval letter:
This preapproval is due to your job stability and excellent credit. Funds to close this transaction are from your personal savings and a seller contribution in the amount of $5,000.
You can see that I have addressed income, assets and credit in this paragraph.
My preapproval letter also includes program type, the sales price and loan amount. Every so often I’ll have a real estate agent want me to leave the sales price blank. This is something that we can do IF the borrower has substantial cash reserves. I’ve found that some home buyers would rather not have their preapproval letters written this way…and I’m happy to provide several preapproval letters with staggered sales prices (as long as the borrower has documented the funds for down payment and closing costs).
You may find a total mortgage payment on a preapproval letter. This is because borrowers are qualified by their mortgage payment since loans have a certain allowed debt to income ratio. If a borrower is a little pushed with their ratios and they find a home within the sales price and loan amount they are preapproved for, but the property taxes or home owners insurance are higher than estimated or mortgage rates climb higher than what they were approved at, you no longer have a preapproved buyer. Whether or not your mortgage originator includes what payment you’re preapproved for, it’s important to ask.
Any conditions to the loan approval should be included on the preapproval letter. Standard conditions on our preapproval letter may include:
- satisfactory purchase and sales agreement
- satisfactory title commitment
- subject to appraisal
- subject to changes to financial situation as disclosed on the loan application (i.e. changes in your employment, debts or assets may jeopardize your preapproval status).
Preapproval letters may also have an expiration date. Before our current lending environment, preapproval letters would be valid for a longer period of time. Now credit reports and other supporting documentation “expire” earlier. Should your preapproval letter expire, they’re typically easy to update by just supplying your latest supporting documentation (paystub, bank statement, etc).
The letter should have a date and be signed by whomever prepared the letter with their contact information.
When I prepare a preapproval letter for someone who’s buying a home located in Washington, at the very least, they have gone through preliminary underwriting. If a mortgage originator has not obtained your documentation or if you have not completed a loan application, you are probably just prequalified and not preapproved.
With HUD’s new Good Faith Estimate, unless you have a property address, you may not receive a good faith estimate with your preapproval letter. This is a glitch with RESPA that I hope HUD finds a way to correct. Even HUD admits that if a mortgage professional provides a good faith estimate without a property address, they’re doing so at great risk (due to the financial liabilities packed in the new Good Faith Estimate). Your mortgage professional can provide you with a “work sheet” until you have a transaction (property address).
If you are shopping for a home anywhere in Washington state, I’m happy to help you become preapproved.