DO NOT ACCEPT PRE APPROVAL LETTERS

Scott - there's only one problem: No Contract NO APPRAISAL. No APPRAISAL  - no APPROVAL. My pre-qualification letters are as good as an approved BORROWER. Once they find the property and the PROPERTY passes then we issue a clear to close. Now we're a LENDER so you're cutting most BROKERS right out of operation. I understand your competition may have beaten you with a pre-approval but that happens. I'm not going to waste an underwriter's time until they have a real deal to work on. The few that are left are very busy trying to close FULL PACKAGES. And, if as a broker, you submit incomplete packages to underwriting just a couple of times you'll find your files going to the back of the stack.

So instead of telling agents never to accept a pre-qualification letter you need to be shouting at the brokers to make sure they issue only SOLID pre-qualifications like my team has done thousands of times successfully.

I know there are lazy, greedy loan officers who just fire off a pre-qual but that's not the truth in every case. We pull credit, ask for docs and verify before we offer a pre-qualification letter.

Do people even do pre-approval letters anymore?  Every letter i send out is an automated approval letter.  Some have conditions, some don't.  I have no problem with a listing agent calling me and asking me about the approval and often they request I make adjustments to it.  Fine.  But to demand a final approval from the underwriter prior to submission won't work.  What happens if the contract isn't accepted?  I'll tell you, often you have to generate a new file that may have an impact on the loan lock.  I think the answer is to get a letter with specifics - approved through automated underwriting with income and assets reviewed, credit was run and is sufficient, and any final stipulations required prior to closing (appraisal & title).  Maybe put in a quick financing deadline and stick to it?  A loan can be originated, underwritten and approved in day(s) today.  The days of a pre-approval letter are gone, just take the time to communicate...we all want the loan to close.  

This is a great post. I know the pre-approval was not the greatest, but it was something. Thanks for enlightening me to this other option.

Scott,

That was a very well written post.  There is an obvious disconnect in terms of communication between most real estate agents and mortgage originators.  I've always laughed when asked by a real estate agent for a pre-approval, which is because pre-approval is just a feel good letter.

A real approval involves so much more, but often agents will shop their buyer to several of their mortgage brokers, and they are in such a hurry to get the thumbs up that they often do not allow the mortgage lender to do a proper job in terms of qualifying the buyer.

So for those new real estate agents, don't assume your buyer will qualify.  If they claim their cousin or friend approved them already (don't believe them), make sure they bring all their paperwork to your favorite mortgage partner, and tell your buyer that you'll get back to them in a couple days.  

 

Hi Scott,

Welcome to the Rain and congrats on your first Featured Post!  How awesome is that?!  These are some excellent points and it leaves us to shake in our boots.  These are some very scarey times we're entering in the real estate business.  I have always tried to get the loan officer on the phone when it's our listing but have actually been told by loan officers that they won't talk to us as the listing agent, if it isn't our buyer.  The other thing is that those conditions are usually there until the day of the closing in some cases.  Also the appraisal isn't usually done until the week or so before closing.  So where does that leave the Sellers?  Well, in my opinion, it's been a shakey process all along but the preditory lendors have made it alot easier and now that is no longer the case.  So back to business as usual!  Thanks for an enlightening post!

Great post. This is the reason working with a Bank not a Broker is suck a key in our market. Banks always seem to take the time to actually approve the client, not just give it a once-over. And their reputation has more at stake!

There seems to be some disagreement among the various mortgage professionals above as to how much weight a letter carries, at what stage approval can be obtained, and how much information can be safely given out.  No wonder there is confusion as to what a pre-qual or pre-approval letter means or what we as agents should do with it!  I personally put little faith in them, and advise my seller clients as such.

That said, it is obvious that in life there are no guarantees.  Some reputable and honest lenders probably issue letters fully believing a loan will fund, but some unforeseen glitch leads to a collapse, while others are just flat out lazy and dishonest and are just hopingit will fund by some miracle.  Either way, any "pre" approval is as speculative as the pre-approved credit card offers I get every day.  Any loan has the potential to crash and burn up to the very last minute.  Even with constant communication with lender and buyer's agent, I've had financing unexpectedly fall through within days, or hours, of closing.

But, this doesn't alleviate our obligation as agents to at least make what reasonable efforts we can to follow up on these details and at least ask the right questions to try to catch any glaring inconsistencies in the buyer's ability to close.  Getting it wrong, and not even trying, are two different species of bad.

With titles, surveys, disclosures, inspections, financing, repairs, termites, lead-based paint, mold, appraisals, ordinances, CCR's, and the countless other issues which can arise in a transaction, our duty is to act in good faith in addressing and following up on each of these issues, NOT in controlling them.  We don't have that power.  We can view pre-approval letters with a jaundiced eye all we want, but absent some better means of pre-determining a buyer's contractual strength, all we can do is follow up to what limited extent is possible.  Lenders are likewise constrained by the completeness and validity of information given to them when providing pre-approvals, and do not exhibit complete control over outcomes.

However, I think more open dialogue such as this between agents and lenders will certainly pave the way to better results for all, as will enforcement of ethics on all sides!

Scott....  I don't want toi be a bah humbug here...  What I think people need to know is the difference between a pre-qual letter and a pre-approval letter. In realty, the pre-approval letter should be the commitment letter. The letter you ga example to is a pre-qual letter. And I think we have many confused people in this forum. Even some loan officers.

On another note... it sounds like some loan officers in here just do conventional, because all they talk about is DU and the approval. If you do FHA, most loans run through the system will be referred and manually underwritten. It also sounds like we have a lot of brokers in here. At my company, we underwrite in-house.

Overall, I am going to agree with Ken Cooks comment the most. I think you are giving certain people in here false hope on what to accept and not to accept. My pre-qual letters are just as good. Why?  Because I know what I am doing. And for you to tell people what to accept and not to accept, in my opinion, is giving misleading information. You are talking about the unscrupulous loan officer that will fire off any type of piece of paper.

Which means that if I wanted to, I could print out a commitment letter with a bunch of conditions and it still might not mean much. So, for arguments sake, couldn't we say, don't accept commitment letters also????  Just my .02, but I could find an argument for all of the above.

PS.....  Scott... I also agree with Dennis Serra's statement. The borrower has privacy rights. In realty, there isn't too much that you can tell anyone else. That is a fine line that is not mentioned and some comments in here say otherwise.

Jeff...BINGO.  Paper is paper and is only as good as the integrity of the LO.  Too much goes into the approval process to give a rock solid 100% CTC (clear-to-close) in hours, or sometimes days.  And a CTC is what everyone is looking for.

Scott, If is a Fannie or a Freddie loan I have no problem handing that out. You are right about the 3 days for approval.  The only problem that I see in Florida is many Realtors like to play both sides. Once you hand off all the info they will try to undercut you.  But that goes back to control.  I have no problems in that department. 

Kim Murphy on Active Rain sent me a great Pre Approval Letter for clients.  It outlines to the Realtors exactly what has transpired.  I have used for the past few months and the Realtors I deal with really like it because they know exactly what has transpired.

Jeff, correct me if I'm wrong its been about two years since I did FHA but can't you manually submit prior to acceptance of a contract or appraisal to the lender?  I did this all the time when I did FHA.  This way at least you know they have gotten conditional approval based on XYZ stips from the underwriter.  I am curious as I will be doing FHA again shortly, Chase was my goto for the manual underwrites as they were easier to deal with at the time. 

In addition most of the nonconforming lenders that are left have automated underwriting engines online and if they don't then the loan officer/broker is dealing with a passthrough and should due the due diligence to find out who they are selling to as that lender will always have the better rates.

I have a story.  I went into escrow representing the buyer on a manufactured home.  The buyer had been approved for a loan, although struggled to get approved.  The selling agent put on the listing that this home was on a permenant foundation (it is only 2 years old).  It was not.  The buyer really liked the property, and long story short 4 months later work was done, permits pulled, and finally HUD's 433 was filed with the county.  However, in this 4 months, the lender supposedly changed their criteria for manufactured homes, and the buyer no longer qualified. 

This is incredibly enlightening to see so many different perspectives and points of view.  All respectable and valued.

Here's my take on this....I am a mortgage broker (i AM the broker) in 4 states, CA,FL,CT,VA.  Hindsight being what it is....who would have known that being in four of the hottest selling markets in the past 3-5 years would have resulted in being in 4 states that made the top 10 for foreclosures!

I really put much of the blame on the so called professionals in our industry.  I compete all the time with "approvals" that i know are 100% BS (can i say that in a blog?).

I am always challenged with one of two things.....either the Real Estate agent is in bed with a broker (brother in law, broker's sister, golf buddy) and will do anything and everything they can to inject as much fear as possible into the borrower based on the fact that they were a direct referral from the Agent, or the home buyer honestly believes that they can get something for nothing.

What we do is this.....buckle up kids, this may be a bumpy ride.....we get an investor approval, usually DU or LP, in some cases an investors proprietary AU engine which is driven or influenced by DU or LP, and we educate the borrower on what it means to be in a buyer's market.  ASK for SELLERS CONCESSIONS.  We charge 1pt on the front and typically try to get one on the back......here's where it gets hairy....

We actually tell the borrower what fees we charge to do the loan.  Once we have received all of the borrowers income and asset information, we run an AU and give the borrower the ability to lock in thier rate and fees.  We offer a no surprises guarantee.  We will provide the Agent or Borrower with the actual investor AU approval and Rate Lock.

Sure, we run the risk, and it does happen, of the Agent taking the information to their broker - but more importantly we earn the borrowers trust and the Agent's as well.

This is a great topic!  I applaud you for bringing it to light!

I can appreciate the concern that you have when a buyer is making an offer on your property, and i really do not see how you would be losing anything by requiring at a bare minimum, contact with the lender/broker.  I would welcome this kind of communication between all parties.  There are just too many people that are looking out for number 1, and that doesn't always leave room for the rest of us involved in the transaction.

You did good on this one.

I always run my borrowers through some type on automated underwriting and give my realtors a copy of th e findings.  Once I have done this, everyone knows what is needed to get the deal closed on time.

Wishing You HAPPY HOLIDAYS and Best Wishes for A GREAT YEAR 2008.

Tommy   New York Certified Home Inspector Long Island NY Nassau/Suffolk/Queens Home Inspections

I came late to this post, but there's so much great advice here! Thanks so much.

seems like once again good communication is key in our shades of grey world

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