How Well Does Your Buyer's Agent Know Your Lender?

When it comes to buying a home, it is crucial to have effective communication between all parties involved. While there are pros and cons to deciding whether to talk to a lender or a real estate agent first, it is recommended to consult your agent for lender recommendations. A buyer's agent will likely refer you to a local lender, and they can help match the loan you want to a lender that specializes in that type of financing. Additionally, agents prefer to work with clients who have mortgage pre-approval, and they can help you find a mortgage lender more efficiently than vice versa. In some cases, a listing agent may want to talk to a buyer's lender to assess the risk of the lender not funding the loan, which could cause the sale to fail. Therefore, it is beneficial to maintain open lines of communication between the buyer's agent and the loan lender to ensure a smooth home-buying process.

To assess the risk of the lender not funding the loan

Communication between a buyer's agent and a loan lender is essential when purchasing a home. A buyer's agent can help match the loan you want to a lender that specializes in that particular type of financing. They can also refer you to a local lender, which is advantageous as buyers with local lenders are viewed more favourably by listing agents.

Credit Risk

Credit risk refers to the probability of a financial loss if a borrower fails to repay a loan. Lenders assess credit risk by evaluating the borrower's creditworthiness, including their credit history, income, and current debt load. A higher credit risk often results in higher interest rates or the need to work with a subprime lender.

Down Payment

A larger down payment reduces the lender's risk by ensuring the borrower has a significant financial stake in the project. A substantial down payment demonstrates the borrower's commitment and ability to contribute to the project's costs.

Exit Strategy

Lenders want to ensure that borrowers have a clear and viable exit strategy to mitigate risk. This includes the borrower's plan to repay the loan, whether through selling the property, refinancing, or generating rental income. A solid exit strategy provides confidence that the borrower can meet their financial obligations.

Property Value and Location

For hard money loans, the primary consideration for lenders is the value of the property, often referred to as the collateral. Lenders focus on the property's value and location to determine if it can be quickly sold or liquidated to recoup their investment if the borrower defaults.

Tax Returns and Bank Statements

Lenders may request to review the borrower's tax returns and bank statements to validate their financial stability and ability to repay the loan. This helps identify issues, such as unreimbursed business expenses or fluctuations in income, ensuring that the borrower's funds are legitimate and seasoned.

By considering these factors, lenders can assess the risk of not funding the loan and make informed decisions to protect their investment.

To verify how much the buyer can afford

To verify how much a buyer can afford, a buyer's agent will need to have some idea of their finances. This includes information such as the buyer's income, debts, savings, and monthly expenses. With this information, the agent can understand the type of home the buyer can afford in the current market and find listed homes that match their needs and price range.

While a buyer's agent doesn't need to know the specifics of a buyer's finances, it is beneficial for the agent to have a general idea of the buyer's budget and how much they can afford to borrow. For example, knowing that the buyer is looking for a $300,000 home and can afford a loan of $240,000 to $260,000 allows the agent to focus on properties within that price range.

It is common for a listing agent to request to speak with a buyer's lender directly to assess the risk of the loan not being funded, which could cause the sale to fail. The buyer's agent may also refer the buyer to a local lender or recommend lenders that specialize in specific types of financing.

Before selecting a buyer's agent, it is recommended to get preapproved for a mortgage by a lender, as this shows the agent that the buyer is serious. A preapproval letter indicates the loan amount and terms the buyer qualifies for, and agents often prefer to work with buyers who have this preapproval in place.

To check if the buyer is approved for the loan

The buyer's agent will need to ask the loan lender a series of questions to ensure that the buyer is approved for the loan. This includes asking for the buyer's bank and investment account statements to prove that they have the funds for a down payment, closing costs, and cash reserves. The down payment expressed as a percentage of the selling price varies by loan type, and the buyer's agent will need to be aware of this. Many loans require the buyer to purchase private mortgage insurance (PMI) if they are not putting down at least 20% of the purchase price. The buyer's agent will also need to ask the loan lender about the buyer's credit score, as most lenders require a FICO score of 620 or higher to approve a conventional loan or 580 for a Federal Housing Administration loan. Lenders typically reserve the lowest interest rates for customers with a credit score of 760 or higher.

The buyer's agent will also need to ask the loan lender about the buyer's debt-to-income (DTI) ratio, which is the percentage of the buyer's gross monthly income that goes towards paying their monthly debt payments. Lenders use this to determine the buyer's borrowing risk. The buyer's agent should also ask the loan lender if the buyer has any unreimbursed business expenses that need to be counted as losses against the borrower. Additionally, the buyer's agent should ask the loan lender if the buyer is self-employed, owns more than 25% of a business, earns a commission, or is a contract employee, as this will require more from the underwriting process and a history of the buyer's income.

It is important to note that getting pre-approved for a mortgage does not guarantee that the buyer will be approved for the loan. The buyer's financial situation may change, or the terms offered by the lender may change after the buyer submits a complete, formal mortgage application. However, getting pre-approved for a mortgage gives the buyer bargaining power and shows the home seller that the buyer is serious.

To discuss the buyer's financial situation

A buyer's agent can help match the loan their client wants to a lender that specializes in that particular type of financing. Agents also prefer to work with clients who have mortgage pre-approval, so that neither party wastes time. A buyer's agent will also be able to refer their client to a local lender, which is beneficial as buyers can sometimes be at a disadvantage during offer negotiations if their lender isn't local.

A buyer's agent will also be able to help their client assess whether they can afford a down payment, mortgage payment, and ongoing home maintenance costs. They can also advise their client on checking their credit score and seeing whether they're in a good position to get approved with good loan terms.

It's also common for a listing agent to want to talk to a buyer's lender as part of representing the seller's interest. This can help the listing agent assess the risk that the lender does not fund the loan, causing the sale to fail.

To ensure the buyer gets the best deal

A buyer's agent will talk to a loan lender to ensure the buyer gets the best deal. This communication is essential, as it allows the agent to assess the risk of the lender not funding the loan, which could cause the sale to fail. The agent can also ensure that the buyer is getting a competitive rate and that there is no potential conflict of interest, such as kickbacks or gifts that may influence their recommendation of a particular lender.

As a buyer, you can ask your agent for lender recommendations and get pre-approvals from several lenders to choose the one that offers the best service and terms for your needs. It is also a good idea to ask the lender key questions about loan rates and terms, origination fees, down payment requirements, and the loan process.

Additionally, a buyer's agent can provide valuable insights to the loan lender, such as raising concerns if something seems amiss. They can also help facilitate communication and provide any necessary documentation. Overall, effective communication between the buyer's agent and the loan lender is crucial to ensuring the buyer gets the best deal and a smooth home-buying process.

Frequently asked questions