Gilbert Real Estate Blog
~ by Randy Hooker of Dreamcatcher Realty
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What do you mean you won’t show me houses unless I have Mortgage Loan Pre-Qualification?!?!
Before I dive headlong into a subject that all too few Gilbert real estate agents and home buyers avoid like the plague, let me tell you a quick story.
6 months ago, an out-of-state client asked me to take some extra photos of a dozen or so high end ($750K – $1.5M) homes in various parts of the greater Phoenix area. The client assured me he would be paying cash for a second home, and that I shouldn’t worry about a POF (Proof of Cash Funds).
I tend to take people at face value, so I took my client at his word and met his requests. The project resulted in my taking pictures of some very nice properties, but they were scattered from Cave Creek to Queen Creek and included a couple of very nice Gilbert foreclosure real estate houses.
I spent no less than 14 hours on the project, took over 500 photos, and drove over 300 miles. I uploaded all the pics to him via Dropbox, and encouraged him to have fun.
A few days lapsed, and I hadn’t heard a word from my client. After emailing and calling him a couple of times, he finally confessed to me that his ‘CASH’ had actually been coming from a second mortgage loan (HELOC) on his primary residence. Unfortunately, after 3 long, hard weeks of trying to negotiate the loan, he had just been formally and officially declined by the underwriter. As remorseful as he was for having wasted my time, he would not be able to move forward with the home search. The feeling for me was quite similar to taking a direct kick to the solar plexus.
I really wish I could tell you this was the first time I’ve experienced something like this, but alas, it’s not. I’ve lost count of the times home buyers have told me they had plenty of cash reserves, only to ultimately find out days, weeks or months later that they couldn’t live up to their representations and expectations.
I tell you all of this not to whine or complain – but to hopefully help you understand one of the reasons a POF or Pre-Qualification Form has become an upfront requirement for so many professional real estate agents and brokers in the Gilbert real estate market. I fully believe that home buyers have the very best of intentions, but in keeping their real estate agent/broker in the dark, ultimately end up in a very costly and time-wasting situation. My personal and professional feeling is that a POF or Pre-Qual Form should be required by every real estate agent and broker from every new client prior to viewing homes with them.
Now let’s fast forward to current times. Just last week, yet another new client asked me to take them at their word that they are solid people with excellent credit, low debts, plenty of assets and substantial income. All they wanted to do was fly in to Phoenix Sky Harbor Airport and have me show them homes throughout the Valley of the Sun – for two days, maybe three. IF they like the Phoenix area and IF they find a home they love, they’ll go back home and secure a mortgage loan Pre-Qual Form.
Here’s how I responded:
“In a sense of fairness, professionalism and good faith, can we meet in the middle? I’ll gladly show you as many homes as you like. All I ask in return is that you send me an advance copy of your POF or Pre-Qual Form. Does that seem fair??”
Now I ask you, my friends … Is that a fair and equitable arrangement between a Buyer’s Agent and a client? Seriously, what do you think?
What does a POF or Pre-Qual Form do for a Buyer’s Agent? It provides the agent with evidence that the Buyer can indeed finance a home purchase, and lets him/her move forward with great confidence that when the ‘right’ home is located, their buyer client will indeed be able to write the offer, secure a contract and otherwise complete the purchase.
Are there any advantages to a buyer in obtaining a Pre-Qual Form in advance of touring homes? You better believe it! Here are a few of the benefits and values, in no particular order:
- Provides bona fide confirmation of the maximum buying power and price range of the buyer to both buyer and Buyer’s Agent.
- Provides confidence in viewing homes, knowing when the ‘right one’ comes along, the buyer can move quickly to purchase it.
- Puts a lot of the loan processing headaches behind the buyer, thus making the escrow and closing process much less stressed.
- Provides the seller with solid assurance that the Buyer can indeed perform.
- Provides everybody peace of mind that the money/financing is in place – so all we need to do is find the right home.
I’m fully aware that this is a very touchy issue with many home buyers and buyer’s agents. My hope is that I’ve presented a fair and impartial perspective from both sides, but I’m always open to other perspectives, ideas and suggestions.
What say ye, good people?
Arizona’s 2011 AAR Mortgage Loan Pre-Qualification Form
If you run across any claims that the mortgage lending industry has in the past few years been (and still is) in a state of turmoil, I would heartily recommend you listen to them. There’s no doubt that tremendous changes have taken place, most of them federally mandated, but in this post I’ll try to avoid discussing the relative merits pitfalls of the new restrictions and guidelines.
The purpose of this post is to update you on a previous post of mine from November of 2010 in which I defined the then-current mortgage loan pre-approval process in Arizona. The new (effective February 28, 2011) terminology and form(s) have been released, so let the games begin!
Replacing the former Loan Status Report (LSR) is the Pre-Qualification Form. The purpose of the new form, according to the Arizona Association of REALTORS®, is
“to provide information on the buyer’s ability to qualify for a loan without a Good Faith Estimate (GFE)”
Say what?!?! A GFE is a document issued to a home buyer by a lender that details the fees and costs associated with their mortgage loan, monthly payment, interest rate, etc. But it’s also a document that is typically considered confidential between the lender and the home buyer. The new Pre-Qualification Form requires the lender to furnish a LOT of additional information about the buyer, type of loan, amount of loan, interest rate, etc., and thus can provide a great way of evidencing to a seller that the buyer is indeed pre-qualified for the mortgage loan.
The proper use of the Pre-Qualification Form is that it should be attached to a 2011 AAR Residential Real Estate Resale Purchase Contract whenever a home buyer submits an offer on a residential property. Here are a few highlights of the new form:
- The form is NOT property specific, meaning it can be issued without naming any certain property address.
- The form is to be completed and signed by the mortgage lender (loan officer), including their Arizona License number and NMLS number.
- The form is to disclose the marital status of the buyer(s), primarily because Arizona is a community property state and marital status can create contract issues and title requirements.
- The form is to disclose the property type, since different types require different loan programs, criteria and documentation. A good example would be the difference between a loan for a single family detached house and a loan for a mobile home – the differences between the two loan programs are HUGE.
- The form is to disclose the maximum total monthly housing payment, loan amount and interest rate for which the buyer is pre-qualified.
- The form is to include an expiration, which is typically when the buyer’s credit report expires.
- The form is to be signed by the home buyer(s), which is basically granting permission for the buyer’s broker to submit the form with the offer/contract. It also authorizes and instructs the lender to issue a Loan Status Update (LSU) to the seller and broker(s) within 5 calendar days of contract acceptance.
As I stated in my post in November 2010, my biggest beef with the Pre-Qualification Form is the form title itself, not the content. That may seem petty to some of you, but for as many years as I can remember, the term ‘pre-qualification’ has always implied a quick, easy, over-the-phone activity with no application or documentation from the buyer. But make no bones about it - this new Pre-Qualification Form requests and requires substantial documentation and commitment from the buyer and lender, and in my estimation is a giant leap forward in the world of residential Gilbert real estate and mortgage lending.
Of course, I’m always open to comments, supportive or dissenting.
What say ye, my friends?LSR, Mortgage Loan Pre-Approval, Mortgage Loan Pre-Qualification – What does it all mean?
UPDATE: On February 28,2011, the Arizona Association of REALTORS® did in fact release the Pre-Qualification Form mentioned in this post. The AAR also retired the LSR. Here’s an update on the 2011 AAR Mortgage Loan Pre-Qualification Form.
In recent years the form used to document a buyer’s purchasing power and level of pre-approval has been the subject of much debate. The argument usually centers around the form’s inability to consistently and honestly communicate the true “approvability” of a home buyer. In Arizona, we currently use a form known as an LSR – Loan Status Report (Arizona’s standard mortgage loan pre-approval form) to communicate a buyer’s relative financial strength, type of loan product, loan amount available, creditworthiness, etc. This form is typically signed by the home buyer as well as his/her Loan Officer, and it’s imperative that a home buyer secures an LSR before starting to search for homes with his/her buyer’s agent.
However, more change is on the way! There’s a new form in the works that the Arizona Association of REALTORS® has proposed will replace the LSR. At this moment, it’s being called a “Pre-Qual Form,” and it covers the status of a buyer’s loan pre-approval in much more detail than the LSR. In concept, I appreciate the move towards implementing a more detailed form, but I really question the name of the proposed form.
Historically, mortgage loan pre-qualification meant nothing more than a verbal exchange of information, with NO credit reports pulled and NO documentation of income/assets. Anybody could issue a pre-qual to a potential buyer. Personally and professionally, I would much rather see the form called a “Mortgage Loan Pre-Approval Form.”
However… regardless of what fancy form we use, or what we call it, the crux of the issue still comes down to the character, integrity, experience and professionalism of the Loan Officer. In my career, I’ve experienced more flaky, inept and unprofessional Loan Officers than I care to count, but there have also been a handful of Loan Officers that I truly respected. As with real estate agents, where not all agents are created equal, not all loan officers and lenders are created equal. To coin an computer term, garbage in equals garbage out.
Bottom line >>> if a buyer has a trusted mortgage lender / Loan Officer in their corner, then their word, advice and pre-approval documentation is solid gold. It bears repeating – this issue will ultimately come down to the accountability and trustworthiness of the mortgage professional working the file.
Image courtesy of striatic.
Exceptionally Low Interest Rates for an Extended Period Of Time?
Yesterday the Fed announced that they would like to see ”exceptionally low interest rates for an extended period of time.” They have committed to purchasing long term securities that directly impact mortgage interest rates. Experts see a need to help our economy recover and low interest rates are one tool in the Fed shed for promoting economic activity.
The last time the Fed did this was in early 2009, right around the time interest rates for long term mortgages went into free-fall! Rates dropped because the Fed’s purchasing presence spiked both the demand and price of mortgage bonds which directly lowers mortgage rates.
This latest development will likely provide reinforced support for what are already historically low mortgage rates. It may even provide enough pressure to push rates a bit lower. I don’t expect the dramatic decrease we saw when the Fed initiated this type of buying in early 2009. Overall, I do expect our interest rate market to flirt with historically low levels for some time.
Stay tuned, as I am sure there is more to come.
FHA Updates
The FHA Reform Act of 2010 has passed the House in an overwhelming fashion. The amendments calling for increased FHA down payment requirements have been rejected. A second potentially damaging element that called for FHA exposure to be limited to 10% of the market has been shot down. Bottom line is that FHA loan default rates are down significantly and the program is operating more effectively than it has in quite some time.Another hot FHA issue still in the “proposal” stage surrounds monthly mortgage insurance premiums (MIP). Right now, FHA’s MIP is calculated at .55% of the loan amount per year. This translates to a $91.67 MIP on a $200,000 FHA loan. The current FHA Reform Act requests a monthly mortgage insurance cap lift to 1.55% (from the current .55%). This represents a nearly 300% increase. HUD/FHA has stated that while it is requesting the “right” to go up to 1.55% they will likely only raise the factor to .90% for the time being. If so, the change would take that same $91.67 MIP payment to $150.
Stay tuned, folks. The FHA ride is likely to be a long and wild one!
