Real Estate Basics – Qualifying Your Buyers

Posted by admin on May 18, 2010 under Real Estate License Basics | Be the First to Comment

In this installment of the Real Estate Basics series we will review buyer qualification. How to properly qualify a buyer will be covered in a real estate course and is important information to have when making a living with a real estate license. In order to qualify for a mortgage, buyers must prove to be creditworthy and meet the lender qualifications for a loan. Lender qualifications for the borrower will include a thorough review of their income, debt, cash on hand, and net worth. This information is gathered to come up with the debt and income ratios. These ratios are crucial to a borrower’s ability to qualify for a mortgage loan.

The income ratio is important to understand as it determines the amount of money the borrower qualifies to borrow. A borrower’s proposed housing expenses, including principal, interest, taxes and insurance, is divided by the borrower’s gross monthly income in order to calculate the income ratio. Most lenders require that a borrower’s income ratio be at no more than 25 to 28 percent. In order to pre-qualify a buyer for the appropriately priced properties, their monthly gross income should be multiplied by 25 to 28 percent. The monthly payment for the properties you should show them should remain within that range to help ensure loan qualification.

The debt ratio includes all other monthly debt along with the proposed housing payment. The total of all debt divided by the borrower gross income should not exceed 36% for a conventional mortgage, however some types of FHA backed or VA loans will allow the debt ratio to be as high as 41% of the borrower’s gross monthly income and still qualify for the mortgage.

Beyond the debt and income ratios, lenders are looking for stability in a borrower’s income. Specifics that they will be looking for are the length of time the borrower has been employed in their current field and the level of education and training they have completed relevant to their field. If the applicant has had numerous jobs in a short period of time, the lender will require an explanation of the instability. It is helpful if the jobs are in the same field. Any bonus income or overtime that is included in the application will need to be reviewed for its likelihood of continuing on a regular basis before it is considered to be regular income.

Borrowers seeking mortgage approval must have sufficient cash on hand to cover the required down payment according to the loan to value ratio, as well as costs associated with the loan closing. If any of the money to be used for the down payment was a gift to the borrower, a gift letter explaining that the funds were a gift and will not require repayment may be required by a potential lender. The borrower’s net worth must also be established in order for the lender to determine the applicant’s ability to repay the loan in the event that they become unemployed. The borrower must have cash reserves and assets with enough liquid value to exceed the value of their combined liabilities.

Credit worthiness is determined by a review of a borrower’s credit report and FICO credit score. The report is a complete financial history of an applicant including the amount of debt carried and the consistency of payments made on time. Negative payment history may be grounds for a mortgage denial unless the circumstances can be adequately explained to the lender in writing.