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This post was updated May 28, 2024.
It’s hard to overstate how eager Americans are to enter the homebuying market. Even as interest rates have soared, over half of Americans still browse Zillow listings once a week, and nearly a third of them look at listings every single day.
That’s great news for real estate agents, whether they’re conventional full-commission agents or discount brokers. After all, more motivated buyers equals more commissions. But sometimes buyers’ eagerness to own a home clouds their judgment, making it easy for some to get in over their heads financially.
So how can real estate agents tell when a client might be experiencing financial distress? Learning how to identify these clients can save them a lot of wasted time and heartache. It could also help you avoid spending resources on a lead that fizzles out. Let’s look at some of the most common signs indicating a buyer might be in for a bumpy ride on their way to owning a home.
Bad credit
Having a suboptimal credit score is a very common sign of financial distress, and can seriously complicate a home search. Poor credit is usually the result of a series of bad decisions, and it often indicates that a client has unhealthy financial habits. While it isn’t conclusive, it should be considered a serious red flag.
Of course, it’s rare, if not unheard of, for a real estate agent to pull a client’s credit report. But part of a real estate agent’s role is to be a counselor and guide through the home-buying process.
A savvy agent will have a frank, open discussion with their client at the beginning of their partnership, so they get a sense of the client’s goals and intentions. That talk should probably include a few general inquiries about their creditworthiness.
While their mortgage broker is going to be the one to pull their credit report, it’s a good idea for agents to get a general idea of a client’s financial landscape.
If your client has poor credit, there’s a well-known path to cleaning it up. That includes seeking debt relief, paying outstanding balances, and establishing a history of responsible payments. But it’s a long process, so make sure they clean up their credit before you start taking them to showings.
Reluctance to talk to lender about mortgage preapproval
Clients who insist on looking at homes before seeking mortgage preapproval are usually either not serious about their home search, or they could be hiding something about their financial situation.
Experts unanimously suggest seeking mortgage preapproval weeks before you even look at your first listing. In a market as competitive as today’s, with multiple buyers often vying for the same properties, a buyer without a mortgage preapproval in hand simply isn’t in a position to make a serious offer, and they will almost always be passed over for a buyer who did secure preapproval.
Before they issue a preapproval letter, the mortgage lender will look into a prospective buyer’s credit and income, their debt-to-income ratio, and their employment situation. It’s a serious, in-depth process, and clients who are in uncertain financial straits probably won’t be able to secure preapproval.
Many financially unstable clients know this, and will try to gloss over preapproval, suggesting that they’ll talk to a lender once they discover their dream home. Don’t give them a pass; clients who avoid preapproval are not, by definition, serious buyers.
No money for down payment and closing
Another issue you would want to touch on with your client is how much money they have saved for a down payment, as their answer will give you some idea of their financial situation. Although there are loan programs that require little or no money down, most conventional buyers should have at least some money to put down on a home. At the very least, having money saved for a down payment will make it more likely that they’ll be approved for a loan.
They’ll also need money for closing costs. These costs can’t actually be rolled into their mortgage, so even if they go with a zero-down mortgage, they’ll likely have to come up with cash to cover their share of closing costs. If they have no money on hand for a down payment or closing costs, this suggests they’re not on solid financial ground.
Of course, both problems are solvable. A client with no money saved for a down payment can get a cash gift from a family member, or can look into low- or no-down payment mortgages. A good agent can often negotiate a deal in which the seller covers all or most of the closing costs. That being said, a client who comes to the process with no money in hand could be in financial distress.
Poor communication
A lack of responsiveness can often be a sign of financial distress. While there are a lot of potential reasons a client doesn’t return your messages in a timely manner — parenthood, work or life events — a common one is that they know they’re not well-situated financially to undertake a serious home search. They want to browse, but they know it probably won’t lead to anything real.
Just like many Americans who look at listings once a week, clients who don’t have money saved up for a down payment or have poor credit may still want to tour some homes, possibly as motivation to get their financial situation cleaned up. But if they don’t level with you from the beginning, you may end up wasting your time showing them a lot of homes they’re not actually able to buy.
Even if they’re not responding to your messages out of simple absentmindedness, this type of mindset is often associated with poor financial standing — if they chronically forget to return texts or phone calls, they could easily forget to pay their bills on time.
Luke Babich is the CSO of Clever Real Estate in St. Louis. Connect with him on Facebook or Twitter.
