[photopress:darkside.gif,thumb,alignright]This morning I posted “the easy version” (post below this one) of the Real Estate Agent’s Role in the Lending Process. I will now take it over to “the darkside” where the correct answer is a zero down, stated income, stacked costs, sub-prime loan with a pre-payment penalty.
I call it “the darkside” because it goes to least conservative loan product. But both are examples of CORRECT ways to proceed.
Buyer: I want to see townhomes priced at $350,000.
Agent: Have you spoken with a lender?
Buyer: Yes, and here is a pre-approval letter for up to $350,000.
Agent: OK, let’s go see some townhomes.
Buyer finds one he wants to purchase for exactly $350,000.
Agent: How much are you planning to put down (Needed to write offer, as downpayment amount goes into the Finance Contingency.)
Buyer: Zero Down
Agent: Do you have the GFE from your lender?
Buyer: Yes. Here it is.
Agent: OK. So looks like you will need $10,000 for closing costs and prepaids. Do you have that?
Buyer: No, I need you to have the seller pay them.
Agent: OK, well the property has been on market for 20 days. Let me call the listing agent and see if he has any other offers. OK, no other offers. Let’s try to get the property for $10,000 less by offering full price with the seller paying $10,000 toward closing costs.
Buyer: What if the seller won’t pay them?
Agent: We might have to stack the costs, or part of the costs, on top, which would push the price up. But based on the comps, it should appraise with no problem. Let me call your lender and see if we can push this to $355,000 or $360,000, if we need to stack the costs, and how much that will increase your payment.
Buyer: OK. Thanks. Here’s my lender’s number.
We call the lender.
Lender says: You can push the price up, as long as buyer is OK with the payment at the higher price. We’re using “stated” income because he’s hourly, and I can’t get his current income to average out for qualifying purposes. But he has plenty of money to make the payment up to $400,000. I just can’t get the income to qualify on a full doc. So it will be sub-prime with a 1 year pre-payment penalty, until he has two years’ history at his current income. Then he can refi.
Agent: What rates are you using and what did you use for taxes and insurance when you pre-qualled him?
Lender: 6.25% on the first and 9% on the second. I used $250 a month for the taxes and $250 for the condo fee.
Agent: Sounds good. The taxes on this one are $270 but the condo fee is only $230, so it’s a wash. Anything else I need to know to write the offer? I’m using $10,000 for closing costs from the GFE. Does that sound right?
Lender: Better make that $11,000 to be safe. Zero downs are getting harder to do on a stated income basis with stacked costs. Not sure I can squeeze the costs back on the 2nd these days the way I used to.
Agent: Looks like the payment on your first at $350,000 is going to be $1,725 and on the second it’s $564. plus taxes and HOA dues, that’s a payment of $2,790 a month. If we have to stack the costs to $360,000, that will push the payment up on the first by $50 and the second by $15 making the total $2,855.
Buyer: That’s OK. I have no other payments and am working on my credit score to get it up by the time I refi after the pre-payment penalty is over. I have an old judgment I’m working on to get it off my record from my divorce. But I can always get plenty of overtime, so I can handle the payment. I had to rent after the divorce, and I’m just tired of not having my own place and I want to get a lot closer to work with all the overtime I’m doing. Let’s try to make the offer with the costs included in the asking price. But I’m OK if the price pushes up with the costs stacked on top.
It is the agent’s role to know that the offer they are writing is “doable”, that the buyer is aware of his payment and prepayment penalties, and is OK with all that.
I don’t have to be his “Mommy”. I just have to know that he understands FULLY what he is “taking on” and is in full agreement with full knowledge.
Another scenario same as above could be:
Buyer: $2,855 is a lot of money until I pay off my car in a year. Can I do interest only? If I did interest only on the first, how much would that save me a month.
Agent: About $250 a month.
Buyer: Well, let’s just make the offer and I’ll be OK with the higher payment if I have to go that high. I’ll talk about other options with the lender if we get into escrow. If it can’t be interest only, that’s OK. But thanks for showing me the difference in payment. Doesn’t seem like enough to make that much of a difference. I’ll decide later.
Buyer: What about insurance?
Agent: The Master Policy is included in the HOA dues, but you should have a policy for your contents and some other supplements to the Master Policy. But that will not be included in your monthly payment to the mortgage company.
Buyer: OK. I have apartment insurance now, so no big deal. Let’s just write it up and see if the seller will pay any of the closing costs without our having to stack them.
Agent: $11,000 is a lot to get a seller to suck up in this price range, but we should be able to get $5,000 to $8,000.
Buyer: That’s OK. I’ll be happy with that.
Sometimes the lender gives a pre-approval for the purchase price, without going over the payment amount and prepayment penalty. Even if the lender did, the payment could change based on the actual taxes and homeowner dues of the actual property selected. Best for the agent to verify when the offer is written, that the buyer is OK with the monthly payment and terms of the loan, before he signs the offer.
Buyer remorse often equals that the buyer wasn’t FULLY aware of all of these factors at the time he made the offer. Better to confirm all details of what the buyer is getting himself into, before the buyer is in escrow and his Earnest Money is in jeopardy.