When potential homebuyers come to you for help in finding a home, you’ll want to be certain that they’re qualified to make the purchase before you start working with them. Getting preapproved for a home mortgage is another matter: That means that a lender has told the borrower, “We will lend you $X with the following terms.” Preapproval can involve considerable time and paperwork. But prequalifying real estate prospects—simply ensuring that they’ll be able to get financing if they need it and are serious about buying a home—can usually be done in a few minutes. It’s an indispensable step whenever you’re working with a new client.
Prequalifying real estate prospects starts with a conversation
According to Stephen Antoni, broker associate from Mott & Chace Sotheby’s International Realty (Charlestown, Rhode Island), the prequalifying process usually starts as a casual conversation. Just the first minute or so of dialogue with a prospective client will usually give you a clear idea of how motivated they are and whether they’re worth your time. Another couple of minutes will usually give you the client’s financial picture.
“If it’s a couple you’re talking with, you’ll see pretty quickly which of them is taking the lead,” he says. “Ask that person what their timeframe is: when they’re hoping to make a move and how long they’ve been looking for a new home. Often the kiss of death is if they say they’ve been looking for two or three years. That tells me there’s not a lot of motivation or time constraint.
“You need to know, first, what their motivation is. Do they have a timeline? What are they looking for? What can they afford?”
Dig deeper to get more information
Getting the client qualified financially, Antoni says, can be a little tougher. He notes that the agent will sometimes have to ask personal, intrusive questions. He warns that while some prospects will show up with a preapproval letter from a lender, plus tax returns and proof of income in hand, others will just say, “We shouldn’t have any trouble getting a loan; we both have good jobs.” That response, he says, should trigger some apprehension. Many selling agents, he notes, will require a letter of preapproval before they’ll let a prospective buyer into the house.
“So, one of my first questions will be, ‘Are you doing a mortgage or will it be cash?’ If it’s going to be a mortgage, and the prospect hasn’t talked to a lender yet, that’ll be our next step: go to a bank see what products they offer. Your objective, of course, is to get the money as cheaply as possible with the fewest strings attached, and sometimes you have to walk the client through that process.
A client’s income will be an important factor in qualifying them for a loan, Antoni says, but the credit rating is usually more important. If a client has a poor credit rating, an agent should be able to put them in touch with a credit counselor to get it repaired.
“In that case,” he says, “you might have to tell the client, ‘You’ll need to wait six to 12 months before we can talk about buying a home.” If the client is starting a new job, the lender might want to wait three to six months.”
Make it a point to know all of the financing options
A first-rate real estate agent will make a point of knowing lenders, knowing credit counselors, and knowing all the options, Antoni says. For example, he notes, some lenders specialize in providing mortgages to specific professionals, such as medical doctors, who might not have great credit but whose incomes are assured. Agents should make it their business to know of these resources.
Agents should also be prepared to provide alternatives if it turns out that the client isn’t in a position to make a purchase immediately. A prospective client might have recently had to short-sell a home to get out of an underwater mortgage; in some cases, they may have gone through a foreclosure. Usually, Antoni says, if a family has gone a year with no credit blemishes following a short sale, they’ll be able to get a mortgage, but if they’ve been through a foreclosure, it might take three years before they’re considered creditworthy.
“In that case,” he says, “you can sometimes find private financing, which will cost a lot more, but you do what you have to do. I might advise a prospect to look at lease-to-purchase options, which would give them time to get back to normal and establish a new credit line.
“The better agent has a good working knowledge of what mortgage programs are available and how to find them.”
Use a standard questionnaire to prequalify potential buyers
Many real estate brokerages have a standard questionnaire for their agents to use, to prequalify potential clients. You can also view this list of questions for prequalifying buyers from The National Association of REALTORS®.
Above all, make sure that the questions you ask a prospect during the prequalifying process are legal and don’t violate fair housing laws. A crucial guideline is Article 10 of the Code of Ethics and Standards of Practice of the National Association of REALTORS®, which states: “REALTORS® shall not deny equal professional services to any person for reasons of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. REALTORS® shall not be parties to any plan or agreement to discriminate against a person or persons on the basis of race, color, religion, sex, handicap, familial status, national origin, sexual orientation, or gender identity. ” (In practice, this means not only that you can’t refuse service for the above reasons; it also means you can’t steer a buyer toward, or away from, a certain neighborhood or type of property.)
As Antoni advises, an agent will want to find out, during the prequalifying process, whether the prospect is financially responsible, whether they are earnest about wanting to buy a home, and whether they’ll behave reasonably. As they gain experience, agents will encounter clients here and there who will become part of their “clients from Hell” repertoire—but asking the right questions will weed out most of them.
“There is no substitute for experience,” says Ruth Kennedy Sudduth, executive vice president and director of the residential brokerage division of Boston-based LandVest Christie’s International Real Estate. “Because our focus is on special properties throughout New England and the Adirondacks, most people we work with are ‘known,’ easy enough to find on your search engine. If they appear to be reputable, that’s not a guarantee of their sincerity or sanity, but it’s a start. Our culture as a firm is such that one of our team is likely to know, or know of, most buyers.”
The importance of having good credit
As for creditworthiness, Sudduth says, that’s rarely an issue at the high end, where purchases are often all cash. But if any question arises about a prospect’s creditworthiness, “Usually we are quite direct and ask for a letter from a reputable third party that the person has access to resources sufficient to close.” In any case, Sudduth adds, sellers always have the right to choose not to accept an offer based on inadequate financial capability.
Blair Myers, associate broker and leader of the Blair Myers Team (Warner Robins, Georgia), who often represents sellers, notes that agents differ in the requirements they set for the buyers they work with. He doesn’t require a letter of preapproval from a lender before a prospect can view one of his listings.
“I consider it my duty to show my sellers’ homes to anyone who may be interested,” he says. “However, if you’re in a more expensive market and/or representing exclusive clientele such as celebrities, I can see the need for more of a screening process.
“I work with a variety of lenders, so I can connect buyers to lenders who offer exceptional financing opportunities for the well-qualified, as well as other options for those who have nicks on their credit or don’t have substantial financial means. Sometimes I’ll suggest they take some time to work on their financial picture or think about what they want in a new home before beginning their search.”
Find out what is behind your client’s desire to buy
Myers suggests that the first question to ask a prospective buyer is, “What’s motivating you to buy now?” Once an agent knows what’s driving the decision, it’s easier to craft a service model that’s specific to the client.
“With regard to how much they can afford,” Myers advises, “I tell people to focus on the monthly payment, more than the amount financed. Sometimes people get too wrapped up in the total amount they’re financing or the sales price, but it’s more important to consider whether you can live with the monthly payment.
“Is it two or three times what you’re paying in rent? Even if you can afford it on paper, consider how the monthly payment will affect your lifestyle in ways such as dining out, fashion, shoes, travel. If your lifestyle involves large expenses in those areas, you may find it difficult to cut back to pay for a home.”
Myers also agrees with Antoni that one of the key bits of information to learn upfront, if you’re working with a couple, is who the ultimate decision-maker is. This, he says, requires strong people-reading skills.
“The decision-maker will usually reveal him- or herself fairly quickly, and it’s not always who you may assume,” he warns. “Even if one person is not as vocal, he or she may be key to closing the sale.”
Article by Joseph Dobrian. Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His byline has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. His website is www.josephdobrian.com, and he can be contacted at [email protected].