Ancient Mortgage Proverb: No deal is ever 100% certain until the loan is completely paid off.
There exists a chasm in communication, familiarity and point of view between agents and loan officers. Sometimes we try to act like it does not exist and we really wish it was not so. I know this chasm exists, just as you do for many reasons, because I have had real estate agents - very good agents - try to convert to loan officer at my companies and I have seen this chasm immediately appear. Sales are fairly and generally black and white, go or no-go, yea or nay. Either the seller accepts the offer, counters or declines. Every agent I have seen try to become a loan officer has had a difficult time adjusting to the different levels of approval.
There are different levels of approval with virtually every mortgage application to loan process and agents we really need you to do your best accept them even if you don't understand them. Otherwise you're going to continue driving the loan officer (me :) nuts and forcing the weaker ones to lie to you or avoid you. Let me help you not contribute to their delinquency by briefly explaining some of the levels of loan approval and addressing how I handle them individually.
First please recognize the average loan has many human and non-human touch-points. It's not just the loan officer or just the loan officer and the underwriter. There are also as many as dozens of other humans plus automated systems involved. If the loan application is not approved by each and every one of these processes as required by the lending or insurance (mortgage insurance) guidelines the application will be denied and the deal will be done.
I don't care who the loan officer is, where they work or what they say - these are constants and work the same way at every lender/bank/broker unless the person you are talking to has the money in their personal checking account and are personally making the loan - something a loan officer does not have the authority to do for any lender.)
[See the edit notes at the end of this post.]
Application Approval - these are generally worthless. These are generally called a pre-approval and sent on a letterhead from the bank, lender or broker. These are often given only after accepting the application and examining the credit history of the applicant(s). At this point nothing has usually been verified or even documented such as income, assets and job history. (I do give these and I explain this is a CREDIT ONLY pre-approval and I have verified nothing except credit and payment history.)
Credit Only Approval - see above.
Automated System Approval (Application Stage) - this is also generally worthless. The loan officer generally has not verified income, assets and job history at this point. This is where most "approval letters" are issued on that official looking FNMA Pre-Approval sheet. (I give these as well and explain I still need all the documentation and several verifications of documenation from the appropriate source.)
Underwriter's Opinion Pre-Approval - again basically worthless for the same reasons. (I give these ocassionally when there is a borderline issue as in tax returns for example.)
Underwriter's Conditional Approval - this is where the loan officer should have a very good idea if this application will be approved. There can be as many as 3 or more weeks between the Application Approval and this date because this is the first time anyone has looked at the complete application package which will include: income documentation (pay stubs, tax returns, etc.), asset documentation (bank statements, retirement account statements, letters of verification), employment verification, rent/mortgage verification, appraisal, insurance documentation, inspection (if required), fully executed and legible purchase agreement, and whatever else is needed. THIS IS STILL NOT AN APPROVAL! There will be conditions and until the conditions are satfisfied this is not a loan.
Clear to Close (or Cleared to Close) - this is it. This is the first time ANYONE can assure this will be a finalized transaction and it does have an expiration - usually 7 to 10 days after the approval.
-Side note about conditions. I had a first time home buyer ask me about "Conditions" the other day. He's a young and single man so I used an illustration I thought he could easily understand. I said, "Suppose you finally get up the courage and ask that pretty girl out on a date. She tells you she will go out with you if you drive a red sports car, pick her up at exactly 7PM and take her to the most expensive restaurant in town." I needed to offer no further explanation of conditions.
The bottom line is this: If you do your job right, the loan officer does their job right, the title/escrow agency does their job right, the appraiser does their job right, the inspector does their job right, the insurance company does their job right, the buyer's employer does their job right, the buyer's current mortgage company or landlord does their job right, the person giving the gift (if there is a down payment gift) does their job right, the IRS does their job right, the borrower's accountant/CPA does their job right, the seller does their job right, the appraiser does their job right, the HOA does their job right, the inspector does their job right, the processor does their job right, the underwriter does their job right, the closing co-ordinator does their job right, the funder does their job right, the seller's agent does their job right ... that's most of them ... then within a few days to a few weeks we'll meet at the closing table. Until then NOTHING is certain.
Now do you still want my opinion or do you want to wait for the truth?
[Edit notes: When I write the pre-approval is worthless I mean as far as the actual final approval - go to the bank and cash your check. Nobody's pre-approval means the application and entire transaction will be approved. A true mortgage professional will follow protocol and verify as much information as possible before issuing a pre-qualification. I was trained to do it that way many years ago and have trained all my staff members to do so as well. However, there are dozens of moving parts outside of our control. The pre-approval, even the best one, simply means there is no reason at that point in time not to proceed with the process of the application.]
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67 Comments
on Pre-Approval, Approval, Conditional, Cleared - What the ____?!
OCT
24
2009
Ken I'll be interested to see the opinions on this one :) Every pre-approval I do is credit checked, a discussion of income/assets, and an automated pre-approval. Thereafter I let them know the documentation needed. However I will not send out a pre-approval letter unless I am confident the loan will work. Otherwise I tell buyer and their agent (if they have one) all the info, laying it out plain for all to see, to let them decide, etc.
Some people think this method too is useless unless I review income and asset docs. I make sure to review them when I am uncertain. But that's just me. Self-employed-type buyers for instance I require far more documentation even before I will send out a pre-approval.
Hi Ken -- Most agents I've spoken with don't know what clear to close means, and I didn't until a few years ago when I asked. Perhaps a glossary is needed, I'm sure it exists somewhere.
I'm a Realtor who was a loan officer first, I still do both. All "approvals" other than the final are conditional and only as good as the data entered. Garbage in, garbage out. My first job as a lender had significant training on underwriting files and being able to read a credit report, examine income, bank statements and basically troubleshoot a file. When I write a preapproval for my own buyers or for other agents, I have generally reviewed the documentation and have a very strong belief I have a closable file.
On the other hand, even when I've done all this, if I'm working with a new bank or sometimes a different underwriter, I can be surprised by the conditions that seem to come out of nowhere, so ultimately you are correct.
Thanks for the clear explanation. I think you are correct in thinking that most agents don't really know the differences. I breathe a sigh of relief when we get the underwriter's conditions (and they are do-able) but it's not a done deal til I've got my check in my hand.
It is important to make sure your buyer is pre-approved for that specific property not just a general pre-approval(letter). Too many times the taxes are too high or the HOA fee, if the income is tight. Causing your approved buyer to be denied. Make sure your mortgage person has approved your buyer for that specific property, it takes more time. but, then you are playing it safe.
Regardless/irregardless of what the letter says I still belive "The only protection the consumer has is the personal intergerty of his loan originator!"
Nothing is final until it records....so much can happen between beginning and end! It only takes one "right" to go WRONG and it is the end. Too bad so many people learn that the hard way. I spent many years on the mortgage side of this and have actually required funds to be returned to the lender because something went WRONG.....
This is a great outline of the process. Thank you for sharing.
With your permission, I will re-blog this item, and/or may even re-print it and hand it to someone I just spoke with a couple of days ago. Excellent!!
You'll appreciate this one as you write a lot of FHA deals as I do......
Realtor says she is removing loan contingency for her BUYER but is adding an FHA Project Approval contingency against my SUBJECT TO the spot approval but she is fighting me tooth and nail that I have it wrong. What do you think?
Julia - I just want to share and empower. I'm looking to do some buyer recruitment in your area - we should talk soon.
Mark - smart man! It happens. Fortunately it has only happened to me twice. Both times caused by the buyer.
Bill - you are much appreciated for your sage and wisdom.
Scott - allow me to toot my horn a little :) I produced 60 million plus in volume for 5 years in a row (two of those years nearly 100 million) and I can tell you there is a lot of truth in what your friend says. For the agent and seller it's pretty much over when you leave the closing table. For the loan officer/broker/lender it's not over for months ... or years! We can CYA all day long and still get bitten in the end. I like your football illustration.
Well said Ken! I was asked the other day to see the loan commitment letter. Of course I sent the "nixon tapes" version with virtally everything blacked out because it is confidential information.
There was some complaining but I expressed it as you just did. On occasion I get the request for a commitment letter without ANY conditions....NONE. I told them it didn't exist on this planet.
Unfortunately for the loan originator what is approved today can change tomorrow even if everyone above did everything right. I was one of the lucky ones that had a loan placed with Taylor Bean & Whitaker and FED's raided them. Our borrower had signed, we had been told the wire was requested and it never showed up....deal DOA.
Ken, My that was a great breakdown! Heart and soul into it...so we can all just get a pencil out and use it as our little check list while harrassing the lender...is that right? My favorite part of your post, is the bottom line. It covers the whole process very well!
In her infinite wisdom, she simply felt that a spot approval shouldnt take more than a few days. Of course this occurred right at the point where spot approvals were eliminated as of October 1...though since retracted...but still taking a little while.
This was an Excellent Post. I feel fortunate to know what I know about the Mortgage Game as i enter my RE Sales Career. You hit every important point with this post.
As a mortgage person you want to be assuring to the client but you never know 100% until the underwriter and the lender sign off for the clear to close.
Kirk - I've had that request, too. Funny thing is it came from a "seasoned real estate professional" - ya, right! "My lender always gives me a loan commitment before we make an offer." Hahahaha! And you just went to some moron's bootcamp where they told you to "demand a funding commitment!" Thanks for inspiring my mind.
Jane - the new loan officer harassment is the old loan officer hanging up on you :) I know you're just teasing. So am I. Maybe!
Bill N - all I can say is "oh brother!"
Micheal - which was your favorite part?
Russ - even then, after the underwriter (underwriter is the lender for all practical purposes) has signed off there can still be failure. That's what catches us all with our mouths open and often gets the loan officer accused of all sorts of evil they had nothing to do with!
Jane Peters - it's all you get regardless of what anyone has ever told you. And with a truly professional and experienced mortgage professional it's worth something but not a closing. Until the buyer, seller, IRS ... all those people I mentioned and sometimes more pony up with actual evidence it's all still "just a lead". Anyone who wants a "commitment letter" is going to wait until all the verifications and work is done. Until then a commitment letter is a limp handshake. Thanks for the kudo!
Ken - I'll opt for the truth any day of the week. I think you did a nice job of displaying such here. Erin, above, has it right. That's the way to do things. I'd love to sit here and write that I have done those things all along, but the fact is I was a bit sloppy in my earlier years in this industry. While most of my business was always Conforming/Conventional Loans, I encountered a few transactions that didn't make much sense, but were approved. Many times I took the application, ran credit, and handed out that Pre-Approval like the carrot on the stick that it was ... and often is.
No more. I haven't done that crap in two years. If you want a Pre-Approval from me, you'll get the supporting documentation after application and before I even run your credit. Then, and only then, will you get a letter that actually means something...
Good points! It is definitely important to allow all parties in the transaction to know what is to be expected during the course of a start to finish loan closing. Many people have no clue what goes on from the time we get a contract, till the pkg comes out. Flood Certs, Underwriting, Tax Certs, Income review, 4506 verification, asset verification, appraisal order, appraisal review, to name a few.
I appreciate your clarity on this, as im sure many others do.
As we say here in the south, "It aint done, till it funds". GG
Ken - Love the look at the different stages and will be re-blogging to hopefully help some more people understand your side of the transaction. My question is this though - even though the pre-approval is "worthless" do you still feel it is necessary and good? I see what you're saying from a lender's standpoint and know that nothing is guaranteed at that point, but without the pre-approval, we are not quite sure where a client or prospective client stands and more time than not, neither do they. Do you just view it as a necessary evil? Or would you prefer to see them fall by the way side?
Erin - I understand what you wrote. I also understand how you may feel compelled to defend the reputation you personally may be building around your prequalification but you shouldn't. This post isn't about you and you should feel free to continue to feel proud of your pre-qualifications. Just stick with that last sentence you wrote and make sure your borrower and both agents understand that's more important than your prequal.
Jason - thanks for stopping in. Your input is always valuable!
Greg - I'm with you on that. I would venture to say nobody's pre-approval is any more water tight than mine and sometimes one of the other cogs in the wheel fails - no matter how many documents I've seen or how many eyes look at the file.
Dave - we all need to understand and respect each other a little more. Not necessarily you and I personally but agents and loan officers. I remember some years ago when there was a big divide between agents and loan officers unless the agent had a relationship with the loan officer. All other loan officers were treated like ingorant trash by a big percentage of agent. It pretty much went away during the boom and then during the crash it was almost completely gone (adversity brings unity). Unfortunately I have seen heard it from friends on "both sides" of that struggle how it is starting to sneak in again.
Matt - the pre-approval means (in my case) I have seen the credit, I have seen the income and asset documentation and I have compared those with the guidelines for the loan the client has chosen to pursue. The pre-approval means I have seen all of those things and will proceed with working on the file and doing everything within the guidelines to close that loan - and your deal. It means they have not yet been denied.
Ken - That's a good definition - "they have not yet been denied." I actually had a client who was pre-approved and had a hard time understanding why the lender wanted more info. He felt he has been "approved" and therefore everything was golden. The word itself can be slightly misleading. In regards to your comments to Dave, I had a conversation with a local lender about just this not too long ago. He had an agent who was giving him a real hard time and we were chatting about how that can drive a lender nuts. It's easy to blame lenders (or agents, or appraisers, or ...) and make ourselves look good. Seems everyone wants a scapegoat once in awhile.
Your blog is a perfect example of why agents should advise their clients to stay away from mortgage brokers and stick with direct lenders. All of my Gold Services Partners have underwriting authority and irregardless of whether the loan is written as a conforming loan under GSA guidelines or is a portfolio loan, there is one less individual in the picture skimming the "cream" off of the top and one less person that will "lie" to the client and his real estate broker. You see, real estate is a people business, too.
This was a real "eye-opener" for me. It also gives me more to share with my sellers and buyers who like to blame the mortgage lender..as in a "singular guy"..if the mortgage isn't approved and cleared to close. They all want to point the finger at one person to blame! It "takes a village" to close, and I'll be sure to share this with my clients, from this point on. In fact, I'm going to make this blog required reading of my buyers and sellers.
Martin (Synergy/Weichert) - wow. So if you're a mortgage broker you're a liar who skims the cream off the top? That's a very shallow, short-sighted and unwarranted statement directed toward my professional broker friends. I have been a direct lender for the last four years (direct endorsement and all) and I resent your remark. I still have the ability to broker when a loan falls outside of our guidelines - so when I broker, according to your "Gold Service Partner" edict I must be a liar who skims the cream off the top.
Linda - thanks! You are exactly why I continue to blog here on AR. Well, you and Martin, too. You are kind and appreciative and you make it all worth while. I'll be adding you as an associate and subscribing to your blog.
Ken: Thanks for the post. Every loan officer should have the conversation up front with all parties that there is no deal until the loan has been signed and funded. Everything before that is a step in the approval process. Loan officers who take their business and their clients seriously should be upfront on everything including how they get paid. Thanks again!
Great post Ken.. Pre-approval letters meant a lot more a couple of years ago when a "can the borrower fog a mirror" underwriting process seemed to be the rule. I work with a GREAT mortgage broker who is very good at educating borrowers.
The last time I had a client(excellent people) who used a direct lender we had a mortgage consultant (teller?) who informed me that "we have their application" was the TOTAL communication I received during the whole escrow period. This led to several misunderstandings as we approached COE and the Seller was ready to walk away more than once. At closing I discover that the "direct lender" is writing this loan straight to B of A.
I'll stick with my mortgage Broker because when there is a glitch she keeps me in the information loop.
In my home town of Bakersfield, California I write a lot of offers on bank owned homes. Often times the buyer must be prequalified with a specific lender prior to submitting an offer. I always send my buyers to my trusted mortgage broker first but I also let the buyer know that they may need to go through the process several more times before we get an offer accepted.
I think communication is the key. If the loan officer lays out exactly what will happen and explain why, you will have a lot less problems. I can understand the frustration of the realtor. They have done their job and now they need to wait for some loan officer in order to get paid. They way I try to help everyone, including myself, is to keep communicating. Not only will I stay in contact with the borrower but the buyer's agent, listing agent and the buyer's and seller's attorney (In NY the buyer and seller usually have an attorney). I will ask the best way to keep them informed (e-mail or telephone). I will arrange updates twice a week (even if there is no news). My goal is never to have anyone call me me because everyone is informed so they have no reason to call.
Terrific post Ken! I often tell my buyers and Realtors that "there are 1176 steps to close a real estate transaction in the state of Texas and I'm only in control of about 20 of those steps."
I lost a particularly difficult transaction recently because the parties didn't understand this. I'm going to repost your blog on the off chance they are members of active rain!
Great summary Ken. And I'm glad to see you re-buffed Martin (weichert). As a mortgage broker in northern NJ, where weichert is very active, I can attest from personal experience their 'all weichert all the time' philosophy.I has bewildered and disgusted and amazed me all at the same time. How their 'gold service' has not been shut down as ant-competitive has eluded me for years. They essentially 'require' their agents to push all their services (mortgage is just the beginning)on their buyers, and they can only use an attorney on their 'approved' attorney list. To stay on the list, the lawyer MUST order title from weichert title. Don't, and you get kicked off the list. How they get their clients to buy into all this I don't get. Historically their service is sub-par, their rates are not competitive, attorneys hate weichert title. So where they , Martin included get off insulting brokers in their standard course of business, I don't know. They act, and have acted, as elitists, and their actions insult the rest of the market, buyers and sellers included.
Ken, What a wonderful synapses. I am going to re-blog it. Actually was thinking about writing something like this, but had not gotten around it. There is a reason why 33% of loans get turned down, and it is usually not because we do not know what we are doing. Just so many roadblocks we have to go through. And I have no clue why Martin jumped on you. I would guess he just had some bad experiences.
Great post and I totally agree with you. You missed one though:
When everything is said and done and the underwriter puts the loan into docs. We also need the mortgage insurance company to do their job.
I just had a deal fall apart after everything was finished. The doc drawer was ordering PMI-- and THAT DAY PMI decided that they weren't going to insure the loan because Arizona is considered a "declining market."
I called the borrower and told him we would need to start over with a new lender, but a contract clause (timing) prevented that from happening.
So I lost the client-- although I had nothing to do with it-- and he has all of his stuff in a moving van.
Mike G - those stories are all too common unfortunately.
Robert - that's a common practice across the nation on REOs. I'm pretty sure it's a violation of fair trade and is being challenged. Meanwhile we just deal with it. I have yet to lose one to the REO holding bank.
Paul - you are dead on. I try to touch each party at least once a day or whenever I have or need information.
Tom - yep. And all those other moving parts in between that conversation and the closing date.
Deneese - thanks!
Gene - you're a smart man!
Daniel Z - I got the sense of elitism but that's a judgement call. Since you have personal experience you're better at making that. We've had that here with a few groups. In fact that exact attitude is why I bought a real estate agency back in 2004. Fight it tooth and nail whenever anyone promises incentives for using another lender over your services. Keep detailed records of your conversations (names, times, phone numbers, etc.) and file a report to the Federal Trade Commission for possible violations of Fair Trade Practices.
Erin - evidently there is a failure of communication. My comment was not in the least rude - I find it a bit peculiar it ruffled your feathers since I was agreeing with you but pointing out this post is not about YOUR PRE-APPROVALS but the agent's and client's perceptions of the various levels of approval. Perhaps it's one of those issues where my inflection and body language are missing so you read it as if I were delivering it rudely. Nothing could be further from the truth.
Jirius - some people feel inadequate so they have to attack others. I don't think he was attacking me because I'm not a broker.
Ken, I guess since the pre-approval letter means basically nothing, why do lenders ask for it. Why do they say they will not consider an offer without it?
Steve - the prequal means there is no reason yet to deny the file. Many people are simply not aware of the difference between a pre-qualification and a clear to close. In fact most people seem to believe "pre-qualified" means "done deal". Of course you likely already know these but many people do not. Over the years, more than once, I have been asked for a commitment letter prior to the offer being made. When I explain there is no way anyone can give a commitment to lend without following all of the steps I usually get an, "Oh, okay. We were taught to ask for that in a class." Very rarely I have had them say, "My lender does it all the time." Which you and I know to be a little smoke trick :)
I'm glad that you explained the steps in the process. Often people want to ignore the truth and get what they want when they want it and they want it NOW! LOL!
Definately worth a re-blog! We all need to work together as team to get to the finish line. It's not us against them which sadly seems to be the climate between some professionals in this industry. Ultimately we want what's best for the client and we want to get paid for our time. If we all do our job it's win/win for everybody.
Steve - You just provided me with a whole new perspective on the lending process. Sounds like I am not the only one that might lose a little sleep over some of the intricate details of the financing aspect of a real estate transaction.
I really enjoyed the following explanation to one of your clients pertaining to conditions:
"Side note about conditions. I had a first time home buyer ask me about "Conditions" the other day. He's a young and single man so I used an illustration I thought he could easily understand. I said, "Suppose you finally get up the courage and ask that pretty girl out on a date. She tells you she will go out with you if you drive a red sports car, pick her up at exactly 7PM and take her to the most expensive restaurant in town." I needed to offer no further explanation of conditions."
Nothing is certain, and we do need to work together for the best interest of our clients. Thanks for posting.
Ken, where does "desktop underwriting" or "automated underwriting" figure in? I have heard that term used many times by loan officers I have worked with. Is that the pre-approval letter? I think that with that they could give an approval letter w/ conditions, right? And of course everything is worthless until it's been through underwriting - really until it's been funded anything can happen.
Ken, good list and buyers find it a little hard to take but it's true. Until you've got that 'clear to close' you ain't got nuthin! (Chicago phrase with a guido accent).
Very informative. I wish more of my clients had read posts like these before coming to me. In Miami, we see all sorts of things including mortgage preapproval letters where the applicant doesn't even know their own income.
I really feel sorry for mortgage brokers, as often they get strung along by the wholesaler with what I call "running conditions". Not only does it send real estate agents to the medicine cabinent looking for the advil, but think what it does to the buyer!!! (That's why I would only work for a correspondent lender - best of both worlds!)
I normally release loan contingency with the added disclaimer: "....pending funding". The seller always questions this and I explain that I've seen loans pulled the same day as closing, before funding. If I had released loan contingency, my buyer would be out their deposit.
I always tell my buyer nothing is for certain until the loan funds. Then they asked me why did the bank tell them to release loan contingency. I told my buyer because it's not their deposit at risk.
These days, nothing is official until closing. Buyers not being approved for financing is unfortunately very common...this reality worries so many sellers because nothing is for sure.
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There are different levels of approval with virtually every mortgage application to loan process and agents we really need you to do your best accept them even if you don't understand them. Otherwise you're going to continue driving the loan officer (me :) nuts and forcing the 
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Ken I'll be interested to see the opinions on this one :) Every pre-approval I do is credit checked, a discussion of income/assets, and an automated pre-approval. Thereafter I let them know the documentation needed. However I will not send out a pre-approval letter unless I am confident the loan will work. Otherwise I tell buyer and their agent (if they have one) all the info, laying it out plain for all to see, to let them decide, etc.
Some people think this method too is useless unless I review income and asset docs. I make sure to review them when I am uncertain. But that's just me. Self-employed-type buyers for instance I require far more documentation even before I will send out a pre-approval.