- The Washington Times - Wednesday, May 3, 2006

Q:I am a newly licensed real estate agent with a scenario I’d like to run by you. I list a

house for $460,000. Two offers come in.

The first one counters with a price of $450,000. They will put 20 percent down and obtain an 80 percent fixed-rate mortgage.

The second offer is for full price, but the buyers are seeking 100 percent financing.

I have preapproval letters from both parties.

Some agents in my office are saying that I should advise my client to take the lower-priced deal because the financing will be easier to get through. I think my clients should take the higher-priced offer because we have a preapproval letter, even though they are seeking 100 percent financing. What do you think?

A: I agree with you, but with some very important stipulations.

You are the listing agent, and it’s your job to try to get the best price for your seller. Obviously, a $460,000 offer is better than $450,000 if all other things are equal. Your associates are correct in that lenders will scrutinize a loan application more stringently if there’s no down payment.

Consider the following:

• The loan amount is equal to the purchase price, which is a good indication of intrinsic value. If the buyers skip town, the bank’s collateral is worth no more than the outstanding loan. Lenders prefer that the collateral be worth more than the loan amount.

• No down payment means the buyer has no financial loss if he defaults. A foreclosure will result in a ruined credit rating, but there is no down payment to lose because none was made. Lenders like it when borrowers step up to the plate and put down some of their hard-earned money.

• Since the deal carries no down payment, it’s logical for the lender’s underwriter to be a little stricter in its underwriting criteria.

They will want to see that the borrower has good credit, good job stability and good income. They will also scrutinize the appraisal report to make sure that they aren’t overpaying for the property. They will make sure that the purchase price is supported by the recent sales of neighboring comparable homes.

Having said that, I’m not suggesting that you take the advice of your fellow real estate agents. I’m suggesting that you do your homework.

Read the preapproval letter carefully. Call the loan officer and ask questions. How ironclad is the letter? How did he arrive at the conclusion that the applicants were preapproved?

There’s a lot of talk these days about the difference between “preapproved” and “prequalified.” “Preapproved” typically means that the applicant has already been approved either by a manual underwriting or an automated system that is accepted by the lender. “Prequalified” usually means that the loan officer asked the applicant a few questions and determined that he qualifies for the loan requested based on preliminary information.

Obviously, you will want to ensure that these folks have made a loan application and been approved.

Since I have been in this business for so long, I also can’t hesitate to suggest that you check out the loan officer and his experience. Was he recommended by a reliable source? Does he have a track record? A good loan officer simply would not write a preapproval letter for a borrower seeking 100 percent financing unless it was a done deal, with the exception of the appraisal report.

This brings me to the last point. Since you are the listing agent, you undoubtedly did your homework when you listed the home for $460,000. If this price can’t be supported in the marketplace, you may run into appraisal problems. I’ve seen some real estate agents overestimate a property’s value in order to get the listing. A good listing agent will list the property at a price that can be supported through an appraisal.

If the preapproval letter is clear and the loan officer’s reputation is sterling, advise your clients to take the higher offer.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail (henrysavage@

pmcmortgage.com).

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