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Why are there no uniform standards for PRE-approval letters?

WHAT'S IN A WORD???

PRE-APPROVAL is not in my lexicon. Call it what you will, it's only a pre-qualifying or credit review letter.

IMO, there is no such thing as a "pre-approval".

The loan is either approved, with or without conditions, or it is a "pre-qualifying" letter.

As a listing agent, I wouldn't take that title, pre-approval, seriously.

As a selling agent, I use them.

As a buyer's agent, I want a MORTGAGE LOAN COMMITMENT, with or without conditions. That way I know that the loan officer has received documentation and the underwriter has reviewed.

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Via Jay Beckingham (Allied Home Mortgage Capital Corp.):

Why? Why? Why? are there no uniform standards for pre-approval letters?

Let's start with do we all agree and/or understand what it is, the old preapproval letter that is. If I have this right, a buyer and their agent are trying to represent to a seller and their agent that the buyer should be able to acquire the mortgage that is necessary for them to purchase the property that they are submitting an offer on.

Preapproval; pre means before, therefore it would follow that preapproval means before the approval. Let's not lose sight of that!

What documentation is needed, or what documentation does the loan officer, the usual grantor of the preapproval letter, have in his/her possession, to issue this letter?

When the buyers Realtor receives the preapproval letter do they know the answer to the above question, or do they inquire about this? I cannot remember any Realtor asking me what I had for documentation, ie: what I based the letter on.

Credit;

If the lender doesn't have a tri-merged credit report in their possession, shred the letter. Approvals are based on middle scores or lower middle scores in the case of joint applicants. Only a tri-merged report will give you 3 scores. A single or double in file doesn't do this and in my opinion has little to no value. It certainly wouldn't justify spending Sunday afternoon showing the buyer 5 properties, just one man's opinion.

What is the middle score? Do you ask? It not only effects approvals, but also pricing in today's world.

Income;

To fill out an application I'm asking the applicant for the last two years of tax returns, all schedules, the last two years of w2's, and 30 days of recent paystubs, with year to date income. Wouldn't you think a requirement for a preapproval should be at least a w2 from last year and recent paystub with year to date income? I mean we've got fax machines, some people still use those, don't they. We've got scanners and email. How hard is it to get this info. Not hard at all.

The self employed need the last 2 years of tax returns (all schedules), period. There's just no other way. That is still actually a problem, in that we are now into October, and will need some sort of year to date profit and loss.

Assets;

Even cash deals require a bank/asset statement showing sufficient funds to close to submit an offer. Why shouldn't a buyer acquiring a mortgage be required to provide the same documentation.

Okay, if I give you a preapproval letter based on the documentation stated above, you may actually have something there. Certainly more than what you've gotten in the past.

Realtors; insist on it! Require preapproval letters with some strength.

Require that every preapproval letter, from every loan officer, has at least the minimum documentation, or send it back.

So why do we not have to meet any uniform standards for preapproval letters.

Simple.

It's not required!

Posted by Lenn Harley, Real Estate Broker, Maryland & Virginia on 10/25/2009 07:24 AM

Comments (24)

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24 Comments on Why are there no uniform standards for PRE-approval letters?

OCT

These pre-approval letters are like permission slips to use or abuse a real estate agents time.

I grew tired of being burned by "pre-qualifications." As a listing agent, I ask to speak with the lender. If it is a lender I am unfamiliar with, I request the mortgage loan committment.

I also view this as as problem for residential agents, and buyers. It would be nice if the lender or mortgage broker did a more thorough job preapproving the buyer, rather than discover it in the middle of the deal, or worse, shortly before closing!

Gary. Indeed. One of the problems is that the buyer's agent hasn't done due diligence to determine the buyers ability to buy. The listing agent doesn't do due diligence when presenting an offer to their seller. Then they take a worthless letter and think they have a contract. HA!.

Lina. Good for you. As an agent for the buyer or seller, I require a financial statement. I can evaluate the buyer myself.

David. That's why I don't rely on these pre-approval letters that aren't.

Like most things in life, the "pre-approval" letter is only as good as the person who issues it, not the company they work for. It's also important to know what steps were taken prior to issuing the letter. Was it based on a conversation, a conversation and a credit report, verification of assets and income, etc. I've know loan officers who issues a letter to "get the deal" and would figure out how to make it work later. So know who wrote the letter.

Some of our buyer clients, we and the lender wants them fully approved.

Others they pull the credit look at assets, debt to income ratio and say they are good to go and write a Pre-Approval letter.

We don't do Pre-Qualification letters, they are worthless, the credit has not even been pulled.

Pre-qualification letters are not worth the paper they are written on. I will not work with a buyer that does at least have desk top underwriting approval (DU or LP). It's a waste their time and mine.

Any serious buyer will want a underwritten approval (once they understand the difference which the do after we talk) and doesn't cost them a dime.

Lenn,

In our market we work with buyers of vacation properties, and this is cash. Working with buyers, we ask for POF when the Seller's agent request.

When we work with someone local getting a home, this are deals that are far from ordinary, and we start them with a pretty big question mark. It involves concessions from the Seller, parent's participation, etc. Usually we hook the Buyer with a mortgage broker, and then he calls me and tells me whether he can do it or can't, or the conditions to met for him to be able ot do it.

It will not pass the test for a good letter, but geeting an approval prior to having that worked to details contract would not work. Of curse, it is a risk of not being able to close, but I actually can't remember the transaction where the mortgage broker would have failed.

Knocking on the wood

as an oldster i came from an era where all Realtors prequalified their buyers. even if the initial appointment was a preliminary discussion, the buyer was up to snuff on what they needed financially to be able to perform.

i like automated approvals, although i used to like them more. the underwriters may still use them as a guidelines, but guidelines are layered from lender to lender, with their own self imposed policies. the automated approval is as good as the information inputed. if it is supported by tax returns, w2's, paystubs, bank/asset statements it has some credibility, but it's still up to the underwriter.

Of course, a pre approval is PRE. So many things can change between the time of offer and closing. I always say, it isn't closed until it is closed! As a listing agent, I believe (as I do on the computer) n back-ups! As a buyer's agent I want to know basically that my client can afford to buy at the price level I am showing them.

Not having a loan fully approved subject to satisfactory appraisal and title before writing and offer is like going to the grocery store without knowing what's in your bank account to pay. It's stupid.

Tina in Virginia

Lenn - that is a great question and one that I have often asked. I still see lenders using preapproved and prequalified interchangeably. I don't recommend those lenders to my buyers.

Lenn - You are correct in that a pre-approval is actually nothing more than a conditional approval. These days, without a fully executed sales contract, satisfactory appraisal and clear title report, no underwriter is going to grant a loan committment. So until an LO has this documentation, they can only issue a conditional approval.

Having said that though, it is the LO's responsibility to verify everything else in order to make sure that the conditional approval is as strong as possible. While I can't speak for other LO's, my approvals include all the standard documentation (bank statements, pay stubs, tax returns, credit report, etc.) I also include a VOE, VOR as well 4506T reports and a CAIVRS check.

In doing this, I am extremely confident that my clients approval is the best approval that I can get them. If during this process, I discover anything hinkey about their situation that will be an issue in getting them fully approved, I address it then. If they are truly motivated buyers, they will do whatever is necessary in order to get pre-approved. It's at this time that I typically discover which prospects will become clients and which ones won't.

While some people (including other LO's) may think this is a little overkill, they obviously don't live and work in the real estate industry here in Los Angeles and Ventura counties. My market here is really tough and is definitely not for wussies.

If you are not willing to do what it takes to make your clients look as good as all the other thousands of buyerss out there competing for the same properties, then everything you have done is a waste of time, energy and money.

I agree completely... I wish there was some kind of uniform standard. Then maybe our letters would mean more. Realtors will ask me for a template they can use to create pre-approval letters for their clients. Never gonna happen! They seem to be missing the point!

Erin

A standard with real meat that has mandatory acceptance to lenders, buyers, realtors and sellers would work wonders.

Also, regarding cash offers... A standard for bank letters stating that cash is available to cover offer as of current date would be good. Have had clients whose banks refuse to issue any statement other than client's full bank balance in letter to submit with offer to seller. This is an extreme privacy violation.

Lynn. The standard now is that the listing agent has to do due dilligence and make sure that the buyer is qualified.

Erin. Good grief. I can't imagine any loan officer providing that. Although I know it's happened.

Donne. Interesting. Seems to me that buyer's agents would want their buyer to show a strong financial position. I know I do. I've been asked, "aren't you afraid that the sellers will want more if they know how much money the buyers have??." Nonsense, just because a buyer can qualify for more and has more cash than needed, that doesn't mean that they have to spend their money or buy to the limit of their ability.

Mike. I too have met buyers with a "pre-approval" to find that the lender has done no more than review a credit report.

Tina. Well said. However, you'd be surprised at what meny listing agents will accept as a "pre-approval". I have rarely seen a pre-approval letter that I'd accept without more info.

Dick and Dixie. Indeed. I want to know my buyers are qualified before putting them on the raod.

Jay. I come from the "era" where we Realtors qualified our buyers too. Which explains why I have a handle on these matter. I'm shocked by some practices today. Not for my clients.

Jon. Keep knocking on wood. Many agents spend many hours and resources with buyers without knowing that they even have the ability to buy. Further, listing agents accept just about anything you give them from a loan officer. Experianced agents know better.

Mark. I agree 100%.

Missy. Agreed. The time to avoid last minute contract failures is before the contract is written.

Alan. Good point.

Lenn, I am not lucky enough to have worked when realtors pre qualified buyers. But I can tell you, I am doing my due dilligance by speaking with loan officers, on both sides. And I am not bashful when questioning them. It is my job to make sure that I am not setting my buyers up for failure, or my clients time as the listing agent. Or my own time for that matter.

And doesn't it always amaze me when people get mad when you ask for POF from a cash buyer... the nerve...

Lenn,

What Jay brings up above in terms of documentation gives a solid picture of the borrower. If the lender doesn't have that he shouldn't issue the preapproval letter in the first place. Pre-quals are worthless.

Lenn, You have shown the focus light on a critical area. Also having done business since the days when Realtors qualified the buyers, I still find it helpful to do so even if it's done in a bit more informal way.

Had transferees that arrived replete with pre-approval letter on real nice, official looking letterhead. As their home where they were moving from wasn't yet on the market, I felt I should talk to the lender to make sure that info was included in the qualifying--that the buyer's income was sufficient to cover old house payment, new house payment and interest on bridge/home equity loan payments and rest of debt load until old home was sold.

"No, I didn't include the old house payment or home equity loan payments, because the buyer told me he was planning on selling his house." PLANNING??? That Pre-Approval letter on lovely stationery was actually an Implement of Destruction!

OCT

Andrea. Thanks for those comments. I identified with them completely. Many times a buyer will come to us already "pre-approved" by a lender when simple arithmatic shows a 50 front ratio and all I can say is, "Do you know how much money they make?" to which the loan officers says, "we'll get to that when they make an application. GEEZ.

I too want to see the money for cash buyers. I also don't have contracts that fail at the last minute. You're a pro. Thanks.

Esko. Less than worthless, they cost us time.

Nancy. I'm laughing out loud. Goodness. Unless that buyer could get a home with an unlimited contingency to sell their home, they couldn't buy a dog house.

Lenn.... thanks for reblogging this. This has been a pet peeve of mine for almost 2 decades now. I just had a client get a tad upset with me because they demanded a pre-approval letter now. I said, in reality, it's like going through the whole process and is not as simple as it should be. He then tells me that he has spoken to 2 other loan officers that could give him one in 24 hours. hhhmmm.. I said, a pre-qualification letter? I said it really doesn't matter... There should be some sort of law on the pre-approval letters. So many variables, yet so many different people with different definitions on them. lol <sad>

jeff belonger

Jeff. We don't need any more laws.

We need for real estate agents and brokers to take the matter seriously, learn their business, learn to qualify for price range and then require a pre-approval that means something, whether they be listing or selling agents.

It's the agents who permit contracts to get close to closing and then fall apart. After all, what the (*&^%^%& are we paid the big bucks for?????

Lenn, I had to learn this the hard way when I got into real estate a couple of years ago after my very first deal fell apart because of the buyers inability to get financing. I felt like such an idiot! Since then I've made it standard practice to call and speak with the loan officer about the preapproval letter. I've only had one be offended that I called. (needless to say, he was also one of the hardest to work with throughout the deal)

As always, I've learned something from you today, and you have inspired me to be more thorough in my own prequalification of buyers.

Stacie. That loan officer is probably just a grouch and if he weren't offended by you asking about a buyer's qualifications, it would have been something else.

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