Written by ESPINAL ADLER Team’s Real Estate Finance Specialist, Matthew Jablonski.
About ten years ago, a very angry real estate agent with a slightly bruised ego screamed at me on the phone.
I was a loan officer at the time and I had given our mutual client a pre-qualification letter for $500,000. Based on my letter, but without every speaking to me, the realtor submitted an offer for our client to purchase a condominium for $480,000. The offer was quickly accepted.
The day the offer was made, my client called me to give me a heads-up. We went over the specific numbers – in particular the taxes and the common charges associated with the $480,000 condominium. I quickly worked through the math before I gave my client the bad news – They weren’t qualified to purchase the subject property. Their debt-to-income ratio was too high.
I called their real estate agent to deliver the bad news and that’s when I got an earful from her. I had to explain that pre-qualifying a buyer is not an exact science, especially when the pre-qualification is done before a specific property is identified.
Getting pre-qualified is nothing more than a simple algebra equation in which you are given most of the numbers to solve a problem, but some variables remain. A loan officer is trying to calculate their client’s debt-to-income ratio, a calculation used to determine whether or not the lender thinks their client can afford to make their mortgage payment. They are simply comparing the client’s debt to their income.
During the pre-qualification, the loan officer knows exactly how much money their client makes, and because they’ve seen a credit report they know exactly how much debt they are already responsible for on a monthly basis. What they don’t know are the specifics of a property the client might become interested in. They have to make an educated guess about Purchase price, taxes, and common charges or monthly maintenance fee.
A good loan officer will share with their client exactly what variables they “plugged” into the algebra equation and provide examples of how the pre-qualification amount can change when the variables change. If taxes/common charges for a specific property are higher than the original variables used, the amount someone qualifies for will be lower. If the taxes/common charges for a specific property are lower than the original variables used, the amount someone qualifies for will be higher.
*Important footnote: I was one of those kids in high school that said algebra was a waste of time and I would never actually need to understand math like that to make it in the real world.
Have additional questions? Feel free to reach out to me directly at firstname.lastname@example.org or 914.714.9102. Read more about my position by clicking here.