There are buyers and then there are borrowers. If we think about the subject logically, a borrower is probably a buyer also. Why don't so many borrowers become buyers and ultimately, homeowners?
The difference, most likely, is a buyer who obtained a pre-qualified letter versus a buyer who took the time and became approved. These two types of buyers are easily confused by agents and sellers alike. Thinking about what we call these two buyers may help in your understanding of a borrower who can perform and one who only appears able to close on a home purchase.
If we think about what the words mean by being pre-qualified and pre-approved, the issue becomes clearer. A pre-qualified buyer only speaks with a loan officer on the phone discussing their income and debt in general and may or may not even know what their credit report shows. A pre-approved buyer actually makes application to the lender by submitting paystubs, W-2s, financials, job history, applicable explanations, and the file is underwritten through one of the automated systems. The second buyer is only seeking an appropriate property in their price range and down payment requirements – they've been approved to borrow a certain amount. The pre-qual buyer is still in limbo.
If we throw in the qualified mortgage (QM) situation, then we can experience even more difficulty transitioning a borrower into a buyer. Remember that pre-qualified and pre-approved buyers should not be used interchangeably. These are opposing terms in the lending world. In this day and age, it's even more difficult to find a lender who is willing to process a loan for what was once referred to as a "credit pass," because many lenders will not fully underwrite a borrower any longer until they find the property they're ready to purchase.
In our area, Southwest Florida, many of our buyers are already second home owners or new buyers trying to buy their retirement property now, rather than waiting two to five years from now when they will actually retire. These types of buyers require more work up-front because many of the lenders are querying them regarding owning a new home up north and assuming they will be selling their current residence. That isn't always the case.
Just this past week, one of our clients from up north brought their lender's pre-approval letter with them, but did not chat with the loan officer about the fact they were buying a second home. The buyer just said, "I want to buy a new house and I need to know how much I can be approved for." And, the lender did not ask "where" they wanted to buy their new house. When we queried them about how far into the loan application process they had went with their lender, it was apparent the lender believed they were buying a new home in their up North location, not a second home here in Florida. By explaining to them that lenders have different lending criteria for second homes versus primary residences, they understood our concern, contacted their lender and had the letter revised before making their offer to purchase.
So, help your buyer become a homeowner by doing a bit more due diligence when discussing what they want to do versus what they can actually do. It surely will save them from disappointment and you lots of time and effort in the long run.
Benjamin Dona is the Broker and Owner of Gulf Coast Associates, Realtors in Bonita Springs, Florida. He holds two advanced degrees, an MBA and an MA, and has an extensive background in both business and marketing. In 1998, he founded Gulf Coast Associates, and formed a group of like-minded Realtor® associates dedicated to offering professional real estate services by concentrating on information, education and the use of leading edge technologies. He also is a recognized expert on the "Net," a much-quoted and read blog author, and a contributor to both national and international news outlets. Benjamin is a member of the National Association of Realtors, the Florida Association of Realtors, and numerous local real estate boards throughout Southwest Florida.