I received an e-mail from a first time-home buyer who was referred to me by a real estate agent who is helping her in the house hunting process. The e-mail was a simple request that she be qualified for the maximum loan amount possible. She also requested that I send her a schedule of my company's rates and fees.
The nature of the email didn't sit well with me. It was pretty clear that this prospective buyer was completely unfamiliar with the home buying process. Let's look at both of her requests separately.
First, it would be irresponsible of me to simply obtain her financial information and find a lender that will make her the largest loan. If you look hard enough and are willing to pay the price, there are lenders out there who will lend almost any amount of money.
I receive many phone calls with the same request: "How much do I qualify for?" I have been qualifying folks for nearly 20 years and if I've learned one lesson, it's this: Qualify buyers based upon their individual comfort level, financial position and spending habits. Do not qualify a borrower based on how much any particular lender is willing to lend.
While the traditional qualifying guidelines call for a total house payment not to exceed 33 percent of gross monthly income, it doesn't apply to everyone. People have different spending habits. One buyer may be supporting her elderly mother and cannot afford to have one-third of her income apply towards a house payment. Another buyer may be debt free and naturally frugal, easily able to make a mortgage payment that exceeds 33 percent of her income. There are good loan programs available for both.
A good loan officer is able to determine a borrower's purchase objectives and spending habits and evaluate these things in relation to his financial situation. He will then be able to recommend an appropriate purchase price range and mortgage program.
Now let's talk about interest rates. Simply emailing a loan officer requesting a rate illustrates a lack of knowledge of how mortgages work. I replied to my prospective buyer that we were currently quoting 6.125 percent on a 30-year fixed-rate conforming loan with no points or origination fees.
But I also explained to her that the mortgage business is complex and that without the opportunity for me to speak with her, I would be unable to give her any helpful information. In order for me to give her an accurate rate quote, I would need to know not only more about her purchase, but her overall financial objectives.
Consider the following:
- The purchase price range will affect her ultimate interest rate. Loan amounts that exceed the conforming loan limit of $417,000 fall into the "jumbo" category, increasing the rate by as much as a 1/2 percent.
- The down payment can affect the rate. Folks who are seeking 100 percent financing should expect to pay a higher rate than folks with a 20 percent down payment.
- Once a buyer ratifies a contract, the settlement date can affect the rate. If the contract calls for a delayed settlement of 90 days, for example, locking in an interest rate for this long will be a little more expensive than a 30-day lock.
- The expected hold period of the house can greatly affect a homeowner's borrowing costs. If the home buyer is planning on selling the property within five years, for example, he might take out a 5/1 ARM, which carries a fixed rate for the first five years before a rate adjustment. Such a program will carry a lower rate than a 30-year fixed program.
Other financial objectives need to be established. A homeowner might choose a program that offers interest-only payments because he wants to use the reduced monthly cash flow so he can maximize his tax-deferred retirement account. Or, on the other hand, perhaps our home buyer's objective is to pay the loan off as quickly as possible. A 15-year fixed-rate loan would accomplish this goal with a lower interest rate than a 30-year loan.
As far as fees, I said that my company charges a reasonable processing fee of $95. But wouldn't it be responsible of me to provide a full disclosure of all fees and charges associated with the mortgage? Of course it would.
But even this doesn't provide an accurate picture, especially for a first-time home buyer. What about the costs associated with the purchase that is not directly related to the mortgage? County recording fees, for example, can vary greatly depending upon the state in which you are purchasing.
Without having some knowledge of the buyer's intentions, objectives, and abilities, a loan officer cannot possibly provide valid or helpful information.
The bottom line is that a full consultation with a qualified loan officer before the house hunt will provide a first time homebuyer with a comprehensive plan tailored to fit his particular situation. He can then drive around on Sunday afternoons and look at houses, knowing with reasonable accuracy the financial details should he decide to make an offer.
