Financial Issues

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Prequalifing Buyers

Qualifying Your Buyers

Each year, about 1.2 million new households are formed, each representing a potential homebuyer, according to the U.S. Census Bureau. If you really want to tap this long-term potential, you have to understand today's buyers and pick your clients carefully.

Questions for Prequalifying Buyers

Every salesperson has war stories about indecisive, demanding, disloyal, or financially irresponsible clients. They've learned firsthand how important it is to prequalify buyers. Real estate sales guru Walter Sanford of Sanford Systems in Kankakee, Ill., asks buyers to fill out a detailed questionnaire to determine their motivation before signing a contract.

1. How long have you been looking?

2. Are you working with another salesperson or broker? If so, who?

3. How many are in your family? Do you have school-age children?

4. Do you rent or own your current home? Rent amount?

5. Must you sell your home or complete a lease period before buying? How long is the lease?

6. How soon do you need to move?

7. If we find the right property, are you prepared to make a decision now?

8. What is your price range?

9. Do you have a budget for monthly payments?

10. Has a lender prequalified you for a loan? If so, for how much?

11. What’s the name of the lender that prequalified you?

12. How much cash do you want to use for the purchase?

13. Is there a particular location you prefer?

14. How many bedrooms do you need? Square feet? Units?

15. Do you have a particular style of home in mind?

16. Will anyone else be helping you make the buying decision?

17. What special requirements do you need in a property?

18. Where are you employed?

19. Where is your spouse employed?

20. If I give you 100 percent of my time, will you buy your property from me?

21. What times are best for you to view properties?

22. How do you like to communicate—by phone, fax, mail, or e-mail?

23. What's the best time to reach you? At what number?

24. Have you purchased a home before?

What Can Your Buyers Afford?

You need to zero in on prospects who not only want to buy, but who can afford to buy. Here are rules of thumb for determining what buyers should be able to afford:

Conventional fixed-rate mortgage

1. 80 percent to 90 percent loan-to-value. Payments no more than 28 percent of income.
2. Under 80 percent loan-to-value. Payments no more than 32 percent of income.

ARM mortgages

1. Payments no more than 28 percent of income.

FHA loans

1. Payments no more than 29 percent of income.

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Note: Payments include taxes and insurance as well as mortgage debt.

Although questions about finances are sensitive, your tact and professionalism as a buyer's representative can overcome resistance. Use Internet sites such as www.e-loan.com, www.mortgage.com or our local lender sites to calculate how large a mortgage a client can handle and what percentage of income is reasonable to spend on housing.

TIP: Be careful when prequalifying not to tell buyers that they can’t afford a home. Such a statement might be considered steering, a violation of fair housing laws.

When in doubt, let the lender prequalify buyers for you. This can be done by phone. The lender will tell buyers the highest sales price and mortgage they can afford, the best type of loan for their needs, and conditions for loan approval.

TIP: Get buyers preapproved, not just prequalified. Preapproval is a lender’s commitment to lend; prequalifying is a verbal exchange in which the lender tells borrowers in advance how much money they can borrow.

3 Good Reasons to Get Buyers Preapproved

1. Preapproval helps you know which houses to show.

2. Preapproval facilitates the closing transaction (and payment of commission).

3. Lenders can detect any potential problems that might make obtaining a loan difficult. Credit report errors, high debt balances, and an insufficient downpayment may be corrected with time. If credit problems are significant enough to keep buyers from obtaining conventional financing, it’s better to learn about it before you invest time showing them homes they can’t qualify for.

For the Advanced Salesperson

Look beyond the standard rules of thumb on what buyers can afford when analyzing a client's buying power. For instance:

• Take into account assets, such as company savings plans and help from relatives.

• Suggest paying down and consolidating debts.

• Remind first-time homebuyers that they can borrow up to $10,000 without penalty from their Individual Retirement Account to cover acquisition costs of a home. If a spouse is also a first-time homebuyer, each may withdraw up to $20,000.
  

• Try to find a co-mortgagor. Parents who can’t contribute may be willing to co-sign a loan.
  
• Check to see if buyers qualify for FHA, VA, or any state or local programs to assist homebuyers.
  
• Discuss the possibility of a purchase-money mortgage, in which the sellers take back a loan for all or part of the purchase price.

"Reprinted from REALTOR® Magazine (http://www.realtor.org/realtormag) with permission of the NATIONAL ASSOCIATION OF REALTORS^®. Copyright 2005. All rights reserved.”