Recently there have been several posts here on AR with agents, loan officers and a couple of readers chiming in about pre-approvals, pre-qualifications and even Commitment Letters. In this very short post I am speaking only for myself and my companies and what he have, can and will do and the value of it. Specifically focus is on the commitment letter.
Pre-Qualification
If you get a pre-qualification letter from me you are getting a letter which says I have taken an application, examined the credit history and used an Automated Underwriting System to receive an approval level. No income statements have been verified, employment has not been verified and assets have not been verified. This letter means they have the credit history and have indicated they have the income, job history and assets to prove they are truly qualified. This letter can be had in as little as 15 minutes from the first phone call. My letter indicates only the credit has been examined and income, assets and employment have not been verified. Worthless? Not totally because credit tells a lot ... that's an entirely different blog.
Pre-Approval
If you get a pre-approval letter from me it means I have examined the income, assets, credit history, employment history, and have proven all the statement that we made on the application as well as satisfied any conditions of the AUS which apply to the borrower. I may or may not have seen an appraisal, title, home owner's insurance, and other factors related to the property. I also may not have finished the fraud screening in you (the agent) the seller, the appraiser, and the others involved in the transaction. If the deal busts after this it's because the buyer changed jobs, spent their assets, applied for new credit, or the seller or one of the agents has a fraud history or the appraisal, title or insurance has an issue. Valuable? You decide.
[UPDATED] - this can take as little as a day or as much as a few days depending on how co-operative the third parties are. Since it involves verifying rent and income those can be delays.
Commitment To Lend
You will not get a commitment to lend from me. Ever. Likewise from almost every bank and lender in the nation. Commitments to lend are of essentially no more value than the Pre-Approval from above. (Argue if you like, I said I'm writing from my experience and my viewpoint.) A commitment to lend can be issued at any time the bank or lender wishes. I used to work for a company that issued commitments to lend with about 2 pages of small print. Those two pages of small print turned that Commitment to Lend into a Pre-Approval in the first paragraph.
My experience with commitment letters
From the late 1900s through about 2008 my company and I were well known in Georgia among real estate investors. I was deeply involved, well sought by investors and even taught in the John Adams Real Estate Investment Institute at Emory University. What I saw from them about shady deals would pickle the toes of the average real estate agent or loan officer.
The very first Commitment To Lend I held was many years ago and it was a very official stamped and signed document from Barclay's Bank. The loan commitment was for $50,000,000. The "gentlemen" who were brought to my office by a couple of very well known former NFL stars - and I do mean stars - as they were attempting to raise $18,000,000 for a development on an island not too far from Florida.
The men brought at least 1000 pages of documentation to my office. It was all well bound, much of it notarized. It included tax returns, corporation papers, applications to the FTC, and a litany of other items. I listened, watch the eyes of these big football players sparkle and shine and watched them almost giggle as the men described the millions of dollars in profit that awaited them ...
Was it a scam?
Immediately following the meeting I shook hands with the men and the football players and I headed to Marietta Diner for some really good lunch. They asked me what I thought and I told them. They didn't like the answer. You see the Commitment To Lend was real enough. It was the 2000 or so words crammed into a run-on paragraph that made it pretty much more useless than a pre-qualification letter.
One of the conditions of the Commitment to Lend was that the men first raise $18,000,000 to be placed in escrow with the bank in London. Then there was a second approval process that needed to be completed. All Commitment Letters come with disclaimers and those disclaimers, in most cases, turn the Commitment To Lend into a pre-qualification with a more official sounding name.
Since then I have seen several "commitment letters", "letters of credit" and even some "German bearer bonds" not to mention a title to the rights of a dilithium mine.
If you think a commitment to lend is any better than a well performed pre-approval letter you've been the victim of some really bad pre-approval letters. This probably makes you ripe to be the victim of a really normal Commitment to Lend.
A Commitment Letter requires a lender to completely underwrite a file with no property. It still takes hours of work if done properly and most lenders are not going to commit their underwriters, processors, set-up team, and the others to even looking at a file until there is a real deal on the table.
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NOTICE: I have been writing in this blog since July 2006. Some of the older articles may contain information that has changed. Please check the date and phone me if you have any questions.
must be a difference of terms between regions. In Massachusetts, if a lender gives you a letter of commitment, the underwriting department has already approved the file and the loan funding - just waiting on a few items to clear like verification of employment before funding, documentation on "gift" money being used, etc.
I WANT that pre-qualification letter because it does precisely what I want from the loan officer, a credit report review. I don't need the rest of the stuff, the verifications of income, employment, etc. That's just paperwork for most W-2 employees.
The pre-approval is more than I need to get a contract accepted, but it will get the attention of the listing agent who believes that the word "pre-approval" is what they've been taught that they need.
LOAN COMMITMENT???? HA! I haven't seen one of them in so long. . . . . . . I was beginning to believe that lenders had "commitment issues". Well, when you read how the government is mucking everything up with their multiple choice guidelines, no wonder.
The contract of sale in MD has a place to provide a WRITTEN LOAN COMMITMENT IN ___ DAYS. The goal of this clause is to have the buyer remove the Financing Contingency. NO WAY JOSE'. There is a form for removing the appraisal contingency too. I use "1 hour prior to settlement" for that one. Agents who are anxious to get their buyers to remove financing and appraisal contingencies are running serious risks, especiall in today's mortgage loan atmosphere.
BTW, one actual LOAN COMMITMENT I received was from NFCU and they withdrew it 11 days prior to closing. Needless to say, I drove the buyers to another lender and we closed on time.
Depending on the circumstances, price range, buyer strength, etc., I use the "loan commitment" in the contract as a negotiating tool. It works for me. Of course, we have to have a lender who will provide that piece of paper by XXX days., usually 25-30 days. With well qualified buyers, it isn't a problem.
Martin - thanks! Commitment to Lend is an industry term and there are actually banking regulations that "govern" the use of that term. In fact, on a Commitment to Lend those items you mentioned should already have cleared - those items would be outstanding on a pre-qualification but not a true pre-approval or Commitment to Lend. As you stated "just waiting on a few items to clear". What if those items don't clear? May has well have been a pre-qualification letter.
Ken, Thank you for providing clarity to the discussion of prequals, preapprovals and commitment...and you have done it masterfully. I have not seen a lended willing to produce a loan commitment without a property since 1995 when the market was super depressed in Seattle. I worked for the lender....and you are absolutely correct that it had more exit clauses than conditions for approval!
Hopefully, agents and loan officers will read your explanation and we can get on the same page of what is what. The term "preapproval" has been used very deceptively by some. Great post!
GOOD ARTICLE, BEEN IN THE FINANCIAL INDUSTRY FOR OVER 20 YEARS AND SEEN TO MANY TIMES THAT A PERSON HAD A PRE-APPROVAL LETTER FROM A LOAN OFFICER AND THE LOANAR NEVER GOT DONE! I THINK THIS WAS DUE TO INEXPERIENCE LOAN OFFICERS OUT THERE TRYING TO MAKE A DEAL HAPPEN WHEN IT WAS NEVER A DEAL TO BEGAN WITH.
Lenn - that's one amazing comment and you tell it from the street level view because you have been in that line of fire. Thanks for your input.
Deborah - thanks. Nobody is going to "commit" to lending until all the i's are dotted and t's are crossed and that means (usually) the dy of or within a few days of closing. That's just the way it is.
Shawn - thanks my friend. Isn't everyone basically pre-approved? I mean pre means before so aren't we all just pre-approved?
Richie - I'm just fat. Not pregnant. <grin> And that really says it doesn't it? It's a loan commitment when all parties are sitting at the table and the closing attorney is passing out checks. No matter what one calls it, how one claims to have some mystical magic or how one pounds their chest there is no guarantee until the deal is done. (In some cases that's not even the end of it.)
Very good clarification. As a seller's agent, I mainly want to see a letter that says that the lender has performed a tri-merged credit report and that the lender has sent it through automated underwriting. Some of the letters don't even say they pulled a credit report...is there a name for that? How about "Not worth the paper that it's written on." Thanks for writing this!
Excellent. I continually have this argument with seller agents. My buyers agents get it, but the sellers side sometimes requests things that make no sense. Spend more time arguing semantics then working on getting the transaction closed.
Kyle - I used to get all bowed up and confrontational when someone would tell me my pre-approval was worthless. Now I understand either (a) they have had a bad experience in the past, (b) they don't know what they are asking for or getting or (c) they are just way to good to stoop to working with such a worm as I.
Ken: Thanks. We won't even start underwriting until we have a full packet which includes appraisal, tax transcripts, etc., etc. I would bet most lenders are this way these days. And we underwrite in-house. They don't have the time or the resources to underwrite a file that is so far from being complete. Recently I had a realtor request I get all the documentation before issuing a pre-qual letter. I obliged although the deal fell through anyway. Really, and as Jeff Belonger pointed out recently, it's up to the loan officer to know when a prospect is qualified or not. We should all be thinking like bankers these days. If it intuitively looks like a solid loan based on our research, we should be able to issue a letter saying the borrower is qualified with the usual caveats. Thanks for the post!
Paul - same here. I'm not going to tie my processing team and underwriting department up sending in applications without a fully executed contract. Period. Not going to happen. Then again I'm not going to lose equity with a real estate agent by giving any kind of approval, qualification or commitment until I am confident in the borrower's ability to qualify for the loan. Pressure me all day for a letter and I'm not giving it until I'm satisfied. If the bank down the street will ... hasta la vista!
Donna - I guess short is relevant :) and you are so right - there are no real shortcuts and people who say they have them generally don't. Kind of like those old DiTech commercials that made it sound like they had less paperwork than any of us or the old Countrywide commercials for "no closing costs" and "no-one can do what Countrywide can".
Aces. This makes me know like and trust you a little more that I did a few minutes ago. Very well thought out and written. Seems nicely transparent too. Now can I get my 25 AR pts for a brilliant comment.
Spot on as per usual. Realtors and brokers need to align themselves with LOs that UNDERSTAND the guidelines as well as or better than the underwriters if they want to have any reasonable level of comfort regarding financing. And even that does not eliminate the variables of title, appraisal, insurance, and nowadays, the sellers ability to come to closing with the appropriate funds.
Pre-approvals, pre-quals, and anything like them are almost a complete waste of time these days. When underwriting can cancel a loan approval for something as minute as a Sears purchase or someone getting pregnant (check the news headlines today) the idea that a bank will actually "pre-approve" someone is laughable.
I'd like to see banks loan based on what they see on an app, verified in minutes (just as is done with car loans) and a law that fixes bank turn-around time to 3-4 days MAX on paperwork. I find it funny that in the days of loose lending the banks would close in a heartbeat. Now that they're under a microscope, it takes weeks for approvals. Clearly banks CAN move fast for approvals when they need to, they just choose not to.
Ken, guess I need to rethink the committment idea, although most of the lenders I've known have been very cooperative and worked with my clients. It's like anything else, you do your best to make sure all the bases are covered. BTW, you have some neat credentials and thank you for taking the time to reblog this subject. Good job.
Great info - Thanks Ken.. Has anyone told you that you remind them of Andy Garcia in that profile pic? Right out of Ocean's Eleven or something.. Well if not, you have now... Thanks again for a great post.
Ken... can you explain this again... lol Seriously, excellent job... In this statement, what you said, was spot on...
"A Commitment Letter requires a lender to completely underwrite a file with no property. It still takes hours of work if done properly and most lenders are not going to commit their underwriters, processors, set-up team, and the others to even looking at a file until there is a real deal on the table."
This is what ticks me off, because this is what so many think a pre-approval is. I still think pre-approval is a loose term. You could argue that it is fully underwritten, but then again, definitely that is what a commitment letter is, a commitment to lend. You did an excellent job with this one. thanks for sharing.
Great job. This is the 2nd one I read today and witih another one commenting on my reuse of the three level of loan applications - with link to FDIC site.
And all I want to have is to explain to my clients on a high level why they need to get pre-approved and what they might expect. Then I send them to mortgage brokers I trust!
Great to learn about the different views and detailed explainations from the pros.
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Blooming for home buyers this summer.
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great information!
Thanks