Remember the days of easy real estate pre-qualification?
Back in 2005/2006 or thereabouts, it was not uncommon to have a type of Buyer real estate pre-qualification conversation that would seem ludicrous today.
You know the one… Where the Buyer admits their credit score is less than perfect (IE less than 600!), that they have saved $0 for a down payment so are seeking 100% financing and would need the Seller to pay closing costs, of course.
At the time I counseled the prospective buyer about such things as perhaps waiting until hubby was no longer a student or even delaying a purchase long enough to save a little something, while attempting some sort of credit repair.
Several Buyers still stand out in my memory…
Mr and Mrs Buyer owned a small townhouse in Lafayette. Mrs Buyer worked part-time while her mother took care of their two pre-school aged children, and she was a stay at home mom the other half of the time. Mr Buyer was a full-time student (at least for the next 6 months) and wasn’t making an income.
They approached me to be their Buyer’s Agent and told me their plan. It amounted to renting out the Lafayette townhouse (assuming 0% vacancy) and getting another mortgage to buy the house of their dreams, which they had just discovered was a foreclosure in Broomfield.
I met them at their house one night, after the kids were in bed. We chatted. I discovered that they had been pre-qualified for the next mortgage by the same lender that helped them by the townhouse.
I wondered how?
The next day I called that lender to get the scoop. Joe of Joe’s Lending assured me Mrs Buyer was pre-approved…. and faxed me a letter to boot. I asked him when the last time he had seen Mrs Buyer was and he replied “Three years ago, when I worked with her to by the townhouse. She is REALLY nice!”.
Oh, Jeez! (Yes, she was an attractive woman.)
Because I was not convinced that she could qualify with a lender that was not smitten with her, I asked the Buyers to simply get pre-qualified with a lender that I normally worked with. I gave them 3 choices of lender and made it mandatory if I was going to work with them.
Let’s just say, we didn’t end up working together after all but I never regretted expressing my concern to them about the possibility of them losing both homes if they couldn’t make payments at some point.
A single woman with no debt, who lived month to month, within her budget. She was what I would describe as incredibly conservative with money and totally responsible. It turned out that this was not in her favor because she also had very little credit history and therefore a low credit score. This woman wanted to buy her first house with 100% financing and borrowed the $1500 for earnest money, from family. She needed the Seller to pay closing costs.
Although she was responsible with money, she didn’t earn much and had no savings. I felt enormous concern because in the event of a job loss, health scare or other unplanned expense, she would most certainly not have savings to help with a regular mortgage payment.
As it turned it, during the inspection period, while under contract to buy a small house in Erie, she had a car accident. It was not her fault and all expenses related to it were paid for by the other parties insurance.
However, the injuries sustained rendered her unable to move forward with the house under contract at that time and the realization of how close she had come to being in serious financial trouble were enough to convince her that she wasn’t ready for this big of a financial commitment.
I am not ashamed to say, I was relieved and pleased to help her get out of that contract successfully, with her earnest money 100% returned to her.
Thankfully those days are gone. I no longer live in fear of getting a call from a trusted lender telling me that he just won the office award for the client with the lowest credit score, EVER.
(Yes, one of my Buyers actually had a credit score of under 480 and the lender assured me that a person actually had to work at it to get it that low!)
Today most of my clients have 20% or more to put down, are gainfully employed and well educated about their credit scores/history. However, I see other potential problems.
- With low interest rates, Buyers have a tendency to borrow more, thereby making their monthly payments just as high as when rates were 3% higher.
- With good credit, Buyers can buy a house then go out and get other lines of credit too. I see people snapping up credit cards with 0% interest for the next year to furnish their bigger homes, they put travel on credit cards or apply for additional loans for purchases such as cars.
I know the line may not be as fine as those folk who barely qualified in 2005 and would never qualify for a mortgage now, but I still worry. The difference between having enough in the bank for this months mortgage and not, could be as simple and quick as;
- Unplanned health issues or pregnancy.
- Unexpected home maintenance items, like a needing a new furnace in the middle of winter.
- Car trouble.
- A late credit card payment, leading to a higher interest rate.
- Job loss or pay cut.
I want to be the Realtor you call when you want to sell, not when someone is forcing your hand.
Final (happy) thought: Plan for the expected too.
Don’t get so giddy at the prospect of low interest rates and more house, that you forget about the “other” things in life that want your money – and that you may have to sacrifice if you take on a huge mortgage commitment.
- Retirement account
- Starting a family
- Saving for college
- Finishing the basement or renovating the kitchen
- Learning to fly – or whatever is on your bucket list!