When are Home Buyers Really Qualified?
Home sellers are led to believe that home buyers that are requesting to preview their home are qualified to purchase it. The question is, are they?
There are certain moments in a real estate transaction that excite the senses. One is when a home seller receives a call stating that someone wants to see their home. Hope, excitement, and intrigue invade their thoughts. Will the buyer like the home, if so, will they make an offer, did I change the cat litter and, of course, I hope they are qualified.
The word qualified can mean many things inside a sentence. In the real estate world, it leans heavily towards a buyer’s ability to acquire or possess funds to purchase a property.
So let’s start at the beginning - A buyer’s agent contacts the seller’s agent and says they have a customer who would like to see their property. The seller’s agent may ask if the buyer is qualified. I have yet to get an “NO” answer from an agent when asking this question.
The home tour takes place, the buyer likes the home and instructs their agent to craft an Agreement of Sale. The Agreement is completed and includes things like an offering price, terms, and conditions. One of the conditions may be a mortgage commitment. In that case, it is common for the buyer’s agent to include a letter from a mortgage lender stating that the buyer is qualified to purchase the property.
Now to the question at hand. If the buyer was qualified when they saw the home, has a letter from a mortgage lender stating they are qualified, then why is the Agreement still contingent on the buyer’s ability to obtain financing to purchase the home?
A popular excuse is that the property must appraise or the buyer may not qualify. This is why we have an appraisal contingency as a separate document so that cannot be it. Another is that the buyer can only get a mortgage under certain terms like a maximum interest rate. This I can agree with but most lenders allow the borrower to lock the interest rate 60 days prior to settlement at no charge. Mortgage conditions can be worked out between the prospective buyer and lender before they make an offer on a home.
Let’s take a closer look - That mortgage letter the seller’s agent receives is often riddled with holes. There are more cases of buyer’s agents calling their favorite mortgage lender and asking for a commitment letter to attach to the agreement. The lender has never met the buyer and would not know them if they were standing in behind them at a grocery checkout line. The mortgage letter is full of conditions like verification of employment, verification of funds, and verification of everything else. The letter ends with a sturdy disclaimer allowing the lender to rescind everything on the document.
It is unfortunate but since the advent of the internet and the mass hysteria of agents accumulating prospective homebuyers through their favorite home search portal, less than 1/3 of these home buyers have ever been pre-qualified for a mortgage. It is also very likely that the showing at the home was the first time the agent ever met the prospective buyer. This is all in my humble but educated opinion, of course.
Okay, so the home seller goes along with the mortgage commitment contingency and signs the Agreement. Four or five weeks into the deal the buyer’s agent delivers a conditioned mortgage commitment to the seller’s agent. Interestingly enough, it has 14 conditions that have to be met by the buyer before the lender will consider funding the home purchase. I recently received a mortgage commitment, as it is loosely referred to, that ended with the following statement…”New conditions may supersede the above conditions”. This basically means the mortgage lender can change the conditions all the way to the time of settlement. Sounds like it could be a bit unnerving to the hopeful home seller.
I believe there are times when a mortgage commitment during the purchase of a property is necessary. I also believe that too many agents use it as blanket coverage to allow their customer to exit a transaction.
So the question remains…Was the buyer qualified when they called to see the home or; when the agreement was submitted with a mortgage approval letter or; when they received the mortgage commitment from the lender that is full of conditions and an escape clause for the lender or at settlement. In my opinion, the way sales agreements are written the home buyer is not approved until the settlement of the property.
Knowledge is power!
Jeffrey C. Hogue