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Pre-Approval Letters: “Are you a ‘SERIOUS’ real estate buyer?”

Loan officers don't approve loans!

Just as Realtors® don't approve acceptance of offers, loan officers don't approve loans. Lenders approve loans. In both cases, the Realtor® and the Loan Officer are acting as facilitators of the transaction. Neither of them has the authority to legally bind the parties they represent.

A Pre-Approval Letter is such a strong buyer's tool because it means that a Lender has reviewed the buyer's application and supporting documentation (pay stubs, bank statements, W2's etc.). In addition, the Lender has agreed in writing, that they will loan money to the buyer if they find an acceptable property. Loan officers can confirm to a buyer that they will be able to get a loan. The Lender will confirm that the buyer is actually approved for a loan. This approval will have loan conditions to satisfy, but it is a real approval. The predominant condition will of course be that the buyer finds a piece of acceptable real estate! Pre-approvals are issued without an address.

Your chance of being viewed as a Serious Buyer skyrockets when the seller and the Listing Agent are presented with tangible proof that you, as a buyer, prepared for this transaction in advance. The Pre-Approval letter indicates that you have taken the time to sit with a mortgage professional, discuss the details of your financial situation, applied with a Lender and been approved by that Lender, before looking at homes.

Understanding why Pre-approval Letters are crucial is necessary for real estate buyers. (opens in a new window)

Another Real Estate Article from SoundBiteBlog

Posted by Mark Flanders on 06/10/2007 10:54 PM

Comments (40)

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40 Comments on Pre-Approval Letters: “Are you a ‘SERIOUS’ real estate buyer?”

JUN

2007

Mark,

Well put. It's always a good idea to keep the value of pre-approval versus pre-qualification before consumers and real estate professionals.

Fran

Mark, you did a great job of explaining this. No matter how strong we Loan Officers feel that a Borrower is, the loan is still not approved until an Underwriter has looked at the 1003, all the necessary documents, and verified everything.

We used to have what we called "swiss cheese" letters... named for obvious reasons. Now, in Arizona, we have a fairly good Loan Status Report, but sometimes we find that the loan officer just flat out lied on the form. Not many, but some, and they seem to not care. Many loan officers are not personally licensed, just folks working under a broker who IS licensed. It is a hard job, and the good ones are priceless!

Mark,

Great way of explaining this! Just another part of Buying a Home 101!

Thanks for sharing!

Lucky :)

Mark - I think there is a lot of ambiguity in the lending business when it comes to pre-approvals. There are many Loan Officers who write pre-approval letters on their company's letterhead. Loan approval has not actually been received from or even reviewed by a lender. Here in California, our contract spells out how long the buyer has to get their loan approval. It is something some real estate agents take too lightly only to have it rear it's ugly head just before it's time to close escrow.

I'd love to hear your thoughts on the value of a pre-approval letter that is written by the Loan Officer and not written by the actual lender.

Thanks!

Mark,

Much needed post and something that is not discussed enough.

JUN

2007

Great post Mark! There is too much ambiguity around this process.

Mark -

You raise good points. Unfortunately, I have run into so many people who "say" they are preapproved for a line of credit -- only to delve further and ask...1. Did they ask for paystubs? 2. did they ask for w2's 3. did you sign a loan application?

Only to hear 1. No 2. No 3. No, I'm not signing anything until I have a deal

Ok, what information did you give the LO? Oh, I told them how much I make per hour and they told me my credit score is good. VERY flimsy prequal -- and yet the applicants have loyalty to that LO because they said, "yes I can do this". I say shame on the LO, shame on the buyers, and shame on any realtor who believes that. You and I know there are too often skeletons in the closet that surface later -- any RE worth their weight in gold will work with a reputable and THOUROUGH LO. Good post!

Good post. Even with our Loan Status Report (LSR) in Arizona there are always loopholes and unpredictible things. Always good for the agent to follow-up, follow-up, follow-up.

Great info Mark! Though I would have to say with this being such a serious buyers market pre-approval is not as crucial as buyers are harder to find. Not to say it isn't important because it absolutely is!

Seems like such a basic step in the process, but it's amazing how many people overlook it or don't realize the importance. Thanks for the positive, informative encouragement!

If it's one thing that is important to me is working with LO's I trust...know ...and will tell me up front what I am facing with the buyer. Docs are even better. Buyers are still coming in...but serious ones? With our market high some tend to turn around and rent! I had this happen last week. And they were well approved!

Mark,

Thank you for the education. This may be just the link to give to a sceptical client.

Great post. I have seen too many pre-qual letters from brokers that are absolutely worthless. I ask every buyer to get a full pre-approval with documents from a funding lender. When we present their offer it is taken so much more serious.

By and large Realtors waste a lot of time with potential customers who want to fast track the process and look at homes. Fewer and fewer cutomers actually come into the office, to go through the preliminary process. Instead of jumping at the bite, find out who is fishing first! Excellent post Mark

I see too many of these slip through the cracks..I just had one with a full approval but the buyer switched lenders twice and the buyers agent never informed us and the deal fell through and we collected escrow..I would welcome any lender who gives accurate information and not the ones that get arrogant when you address why they commit to lending money and then have problems. There now should be a clause written that states that if the commitment period needs to be extended it has to be approved by both sides and if not then money should be returned..but if it is not in writing and the time-line passes then all deposits are in default if they cannot close by the closing date..just like an inspection period. Good information to remind those who do not abide by it.

Great info, thanks Mark. Spending few minutes int his topic saves sooo much time to everybody involved in to transaction, and once again communication is the key!

Yes, a pre approval letter sure goes a long way to giving the seller some comfort when examining an offer. Aren't they pretty standard now?

Mark, Great post. All a pre-approval is based on the information given to us by the borrower the can be approved. Until they give us all the documentation can we really approve it. Of course buyers never lie...

Always get a Pre-Approval vs Pre-qualification. I will disagree to a point, LO's that are educated and have the ability can get a Loan Approval by using DU/LP/DO and those findings are the same as any underwriter will get. So if an educated LO runs a Pre-Approval and it's approved then the if the buyer(s) meet the conditions stated on the decsion then it is an approved loan.

Even in second home resort markets where most of the time Buyers are overqualified financially, the pre-approval letter is always helpful. Thanks for the information, and it's helpful.

Even NOW, with houses not selling so quickly, I get calls from Realtors over the weekend who ask me to produce a letter that will pre-qualify the buyer for a contract they will present within the day. I can't pre-approve, but I can pre-qualify. Hello, lenders not at work.

It is better to pre-qualify than it is to wait and take a chance of losing the property. This is my opinion. I personally have been looking at credit reports for over 20 years and only rarely does a pre-qualification not turn into a solid loan. Granted, I work mainly with A credit clients in a mostly upscale area and will probably get roasted by the sub prime guys for saying this...

I would also like to point out that the VERY PLACE most loans fall apart is when it comes to meeting conditions. So If the pre-approval does not have conditions met, it is not iron clad anyway.

My point is sometimes you as a Realtor will not have time to get a pre-approval and your buyers (who may be perfectly credit worthy) did not get this done. A pre-qualification by an experienced loan officer is WAY BETTER than nothing (obviously) and a short contingency (like we have in California) for the actual approval, will protect everybody in the transaction.

Here at Wells Fargo I do decision my own loans, this gives a qualified buyer an "APPROVAL" with conditions. This is a solid as it get's as an approval. So in my case this Loan Officer does approve loans. The credit officer signs off on the final clear to close to verify all documents are in and acceptable. I strongly agree that you should get a Pre-Approval over A Pre-Qualification.

mark, is there a difference between pre approval letters and prequalification letters? Its my understanding that a prequalification carries even more significance than preapproval. is this right?

Thanks everyone for the comments. There seems to be some real confusion about what an approval is! That sounds like a good topic for a future article, but I'll try to eliminate the confusion with a short addition to this article.

First, some acronyms: AUS, DO/DU, LP, and GIGO ---

An AUS is an Automated Underwriting System. These are usually web-based, secure sites that can identify whether or not a loan scenario will fit a Lender's guidelines. The 2 most popular and well known AUS's are DO/DU and LP.

DO/DU stands for Desktop Originator (loan officers use this)/Desktop Underwriter (the lender's underwriter uses this). This is the AUS designed by Fannie Mae to speed the process of loan approval, cut down on the amount of manpower needed to approve loans and allow Loan Officers to get conditional approvals at any hour of the day or night. The system (DO/DU) gives the approval, not the loan officer. The loan officer follows the directions itemized on the approval.

LP stands for Loan Prospector. This AUS is the Freddie Mac system to accomplish the same task as its' Fannie Mae counterpart, DO/DU.

Many lenders have their own customized AUS's. In all cases, the SYSTEM is giving a conditional approval, the loan officer is not.

There are several potential landmines to using these sytems (by the way, I use them on EVERY one of my deals). The biggest potential landmine, in my opinion, is GIGO (Garbage In, Garbage Out). It's an old computer term that simply means if the information entered into the system is not accurate, the result is also inaccurate.

For example: The client states he makes $2500 per month at the interview but does not have pay stubs with him. When the pay stubs arrive, he actually makes $2250 per month. The AUS approval is no longer good! The information must be changed in the system and re-approved. The loan officer cannot simply say "That's close enough" and send the loan to the lender for funding. The loan officer does not have that authority. Only the lender does. Therefore, Loan Officers do not approve loans.

Please keep in mind that this article was written to help educate consumers. It was not meant to be a completely thorough explanation of the loan approval process.

I will try to resond to the remainder of the comments here a little later today. At the moment I need to get to my office. Thanks everyone for reading and commenting. :)

Good post, Mark. This really helps clarifiy a confusing area, especially fo rthe new home buyer - hope lots of them get to read this. Not only does the pre-approval let everyone know the buyer qualifies (and the buyer now knows his/her budget) but it also signals a level of serious intent not otherwise conveyed. Anyone can submit an offer! Not so true to getting pre-approved.

Jeff

great info mark...

I think that many people get confused with the meanings of these forms...

also, I think many LOs are putting out prequal letters instead of pre-approval letters to make a realtor happy... there is liability there that is only evident when a loan is denied.

Excellent Post - I might just send this to some "Buyers"!

Mark,

Great points on the pre-approval process. First, pre-approval letter doesn't have an address. Meaning, the loan depends on the buyer finding an acceptable property. This is often overlooked or misunderstood by home buyers and agents. Second, despite the originator reviewing the applicant's paperwork and okaying it, the lender will ultimately approve the loan, and it usually comes with conditions. This step is also often misunderstood. Good reminder post.

This is one of the reasons why as a Real Estate Agent your Loan Officer attends every appointment that you have so they can have your Pre-Approval letter available upon your request. I would never accept contracts without a Pre-Approval letter.

Hi Mark,

This is some very basic and basically great info to show Buyers. Many don't understand the actual process and what goes into it. Thanks for sharing this info in a very basic format.

Pre-Approval letters and the company that writes them are critical. I've had more "garbage" for lack of a better word, pre-approval letters come through my office lately that aren't' worth the paper they were written on.

As an agent it is our job to make sure that the pre-approval is based on facts and not just verbal information supplied by the buyers.

I recently verified a "pre-approval" and i use that term loosely on this one.... and not only did the mortgage broker flatly lied to me IN WRITING, but then when the deal didn't come together tried to turn the table by saying "I pressured him for a commitment and didn't alot sufficient time for him to produce it", therefore he denied their loan.

Let me mention... they were already 3 weeks behind their commitment date and guess who they believed? This industry well never fail to amaze me.... hmmm i am feeling a blog here.

Have a great night... sorry for rambling.

Well said......Pre-Approval vs pre-qualification is imparative.. Even some lenders are floating the pre-approval letter around with out verifying all data.

Mark, this is important for all the buyers to know. I make them get Pre-qualified before we look, but submit a pre-approval letter with the offer. Book marked for the future buyers.

Mark: Great clarification on the pre-approval process, this type of information is always helpful and appreciated.

I couldn't agree more. Very well put. Excellent post.

The letters I've seen are very vague and have so many disclaimers, that I don't think they are worth much. They certainly don't give me any warm and fuzzy feelings. The loan is not guaranteed until it funds. Up until that time, the lender can underwrite and re-underwrite, ad infinitum.

Please explain why you see these letters as having teeth.

Mark: It's common practice in my area to have a preapproval letter with the offer--sellers ask for it. We have preap letters flying around but sometimes they're not worth the paper they're written on. It's very disappointing to say the least, that a week before closing, after all inspections including appraisal are done that buyers can't get financing after all. I'm sure no lender would want that to happen just like no real estate agent would want a contract to fall through. But is there a way to avoid this scenario so close to closing?

The additional information you provided regarding AUS, DO/DU was truly helpful in further understanding the process. Of course GIGO probably explains why some loans don't go through. Thank you.

Mark, great post and very well said for the consumer to understand.

Mark, well put, I had a similar post on my blog about pre-qualified vs pre-approval. Good stuff!

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