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What is the Difference between a Pre-Approval and a Pre-Qualification?

Jennifer Allan posted a blogand in the comments we discussed the above subject. She asked me to explain the difference between a Pre- Approval or a Pre-Qualification. I know there has been a lot of chat in the rain about deals falling apart in underwriting etc... I have posted a few blogs about the very subject here, and here.

Honestly a good pre-qual is as good as any pre approval, and better than a bad preapproval for sure! Here is my quick explanation of the two.. Which I have turned into THREE:

Pre-approval: Should be a fully underwritten file subject to a house... (using hypothetical house info) in 99.44% of the cases it makes NO sense to do this. It should only be done for the more difficult deal that is "iffy" from the start. (I made up the 99.44%, that's Ivory soap! but it is close to being true! We know which deals are difficult up front and which ones we can do blind folded)
Pre-Qualification: Is basically talking to some one like me, possibly looking at pay stubs or tax returns. (I usually have people read numbers off of stubs, 1040's and W2's to be sure the numbers are accurate, you would be surprised how often the initial response is off, on both directions) And of course full credit report. A good LO will give as good a prequal as Pre-approval.

Some people get the two confused... or just don't ask the right questions for either of the above... Same as in any business, "Garbage in = Garbage out" There was NO learning curve in the past 5 or 6 years... "just take the deal" was the mentality... I started in the business when we HAD to know how to read tax returns, we Had to know FHA and VA. In this decade Loan officers did not need to know, or were too lazy to know the 'right' way to put a deal together. A lot has changed in the past year or so. A lot of balls are being dropped due to a lack of knowledge in the industry today.

Deals should NEVER fall apart if buyers were screened properly... But Loan Officers have to keep up on their guidelines as much as Realtors have to keep up on Values. This has created one other important piece in today's environment:

RE-Qualification... Guidelines have been changing frequently in the past year, some one that could qualify last month may not qualify today. One of the blogs I posted (links above) discuss this very topic.

Deals Don't just fall apart for no reason. Either there is inexperience involved... the wrong questions were asked. A loan officer has to ask probing questions. You cant just ask, "what is your income" You will NEVER get the right answer!

And as Agents, you can not trust a 'dated' pre-approval or pre-qualification. Especially if it is from someone you don't know. You need to double check these qualifications. Now, more than ever, you need to stick to your team to keep deals together. You need a trusted lending partner to keep your clients happy and the referrals flowing after the deal closes. We build each others reputation, and we need to work together as a team to keep OUR deals alive!

Have a wonderful week!

Rob

Robert Rauf

www.robertraufhomeloans.com

Posted by Robert Rauf on 08/04/2008 11:33 PM

Comments (65)

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65 Comments on What is the Difference between a Pre-Approval and a Pre-Qualification?

AUG

2008

Rob - thanks for posting this! How often do you "pre-approve" a buyer versus "pre-qualify?" That was why I asked the question in the first place, because in my recent experience, every loan requires a ton of U/W review, which obviously isn't going to happen without an executed agreement, right?

Or CAN you get a real, honest-to-goodness pre-approval that actually means anything?

I would just comment that in the current market, I find myself recommending to loan originators that they go the whole 9 and pre-approve clients much more often than in the past few years. A pre-qual does leave a fair amount of room for issues to arise, particularly if you do not actually view income documentation or asset documentation. Even experienced loan originators can sometimes be blind sided by large deposits into asset accounts, or deductions from paystubs clients forget to mention. Further with the rapid change in u/w guidelines, and less and less alternative products to underwrite files to, I find loan originators are better off to go all the way and pre-approve the loan. The worst case scenario is you need to update income and asset docs when you get to the point of clearing the loan.

Further I would note, I have been seeing a fair amount of deals kicking out when appraisals are underwritten. This would not be prevented by a pre-approval.

To answer Jennifer's question, I frequently have fully underwritten files waiting only for an executed sales contract. I think it is the safest way to go in 2008.

Great post! Even pre-qualified is not set in stone! You never know when they will buy something and change the ratios. I always say it is never closed until after closing!

Your right...^ above comment! Never done until it is done at settlement!

Thanks,

Tom Davis

World Class DE Realtor

I typically send "marginal files" for pre-approval before giving them any sort of letter to give to an agent. By marginal I mean--dti is tight, FHA loan w/ low end scores, bankruptcy/foreclosure on the credit report in the past 5 years, etc. If a borrower has a score of 680 or better with a clean credit then I will gather their income docs, verify it and give them the letter.

Here, I always get the client pre-approved, with an unconditional approval, before I consider them pre-approved. What that means is that they meet with the bank rep and they take their tax information either for the previous 2 years, or they take their letter of employment, with current income, stating it is a full time job, etc. The bank goes through everything, including a credit check. As long as they have presented everything the bank has requested, and their credit checks out, they are now unconditionally pre-approved. The only thing that may be in question is whether the bank will approve a certain type of property, or a certain condo/building. Once the offer is written up, accepted and presented to the bank, the bank gives their final 'blessing', and they write up the deal. At this point, the bank has approved and will not go back out of the deal. The deal is done. The only way this can fall apart, of course, is if the client goes out and gets themselves into major debt before closing (the bank may or may not check again before closing - but we always assume they will). The only other way this deal may not close, is if the buyer disappears before closing.

Jennifer: an Honest to goodness pre approval is only as good as the LO and their experience. Full blown approvals prior to a contract are possible with most lenders, but in most cases are really not necessary. But it all depends on the LO's experience and knowledge... there are a lot of them out there that should not be in the business. I rarely do a full approval, it is not necessary for the average deal.

Amen on that point. Vital to use people you trust that ask the right questions during the interview with the Buyer. With todays gas in a V8 at almost $5 a gallon, it is crucial to get a solid buyer in the car and have a lender do the background check.

Colleen: you dont need to do that with every deal. It is not necessary and actually slows "real" deals down, if you dont trust the lender you are working with, then it is time for a new one. It is all about the relationship and how your team works together.

Amy, that is spot on, no need for the full blown approval unless your gut is in a knott and you just dont know for sure with out an UW ok!

Mary and Tom... Thanks for stopping by! keep in mind it is guidelines changing rapidly along with buyers who may have had a change....

Sylvie, In NJ, a full approval for everyone is just a waste of time, it is not necessary... Take a look at my comment to Colleen above.

I regularly have contracts accepted just because I spoke to the people, I will not take a deal that will not close. You need a good lender on your team that you trust, if not your team is broken

Thanks for the clarification Rob :)

Hi Kim! is gas really $5/gal in CA??? we are starting to see below $3.70 in NJ

Rob, unfortunately things just don't work like that here. We need a full, unconditional approval, before we can have an agreement of purchase and sale that is not conditional. A conditional deal is not a firm deal, and if it's not a firm deal, it expires usually within 5 days. Our law requires that we have an unconditional deal from the lender, before we can remove financing conditions and make our deals firm. (Unless I'm missing something, this has nothing to do with whether or not we like or trust our lender. This applies to all of them.)

Hi Silvie,

Maybe we are talking about different things. I was talking about Prior to making an offer on a home. All contracts that I am aware of will have a mortgage contingency. It is probalby the difference in Canada vs the states? The vast majority of deals that I am aware of have "qualified" buyers making an offer, with no formal approval. This is the norm, and the way it should be done if you can trust your Qualification. (I know that my qualifications are just as good as my formal approvals)

Robert,

Good explanation. Can't tell you the number of times someone says they're "pre-approved" when what they really mean is that they got a ballpark number from a lender or online based on approximate data - it means nothing.

Steve

Hi Rob, maybe I misunderstood. Sorry.
Here, even before making the offer, we want to know, at the earliest possible opportunity, because we are still facing a lot of bidding wars in some areas. Knowing that we can go in 'strong', by having the client pre-approved, makes all the difference sometimes. In some cases, in order to 'win' the bidding war, we have to go in without a condition on obtaining a mortgage, and we can only do that when we know, without a doubt, that the client is REALLY pre-approved. (Obviously, we have to trust the mortgage specialist, and we have to trust that they didn't take short cuts, and that the pre-approval isn't going to change to "oops, I forgot to do a credit check, and guess what ... they don't qualify after all...".)

GREAT blog most dont know now they can read it. Have a great Week,

I think a lot of people get this confused. Can't tell you how many times an agent tells me that their buyer is 'pre-approved' when all they have is the most basic of pre-quals that isn't worth the paper its printed on. Someone ran a credit check and someone talked to someone without verifying any info.

I agree with Sylvie above that in a multiple offer situation (and I have had quite a few of them lately despite this 'bad' market), having a true pre-approval over a standard pre-qual has made the difference in getting my offers accepted.

I understand what you are saying about if the pre-qual is done right, it should be almost as good, but perception is 9/10 of the game and if the listing agent and the seller believe that a pre-approval is stronger, then that offer will win out - usually hands down, even against a higher offer.

AUG

2008

Thanks for this post. You wouldn't believe how many Realtors don't understand the difference!

In 15 years of mortgage lending regional management, one of my recruiting exercises was to test loan officers on the accuracy of their pre-qualifying skills. It would help in predicting what kind of training might be necessary....along with what we might be setting ourselves up for in terms of headaches and problems down the road.

The scenario I used never changed.

Here's the fun part. My canned situation was about buyers who qualified for approximately $189,000 using published ratios for an FHA loan. BUT, the primary reason they qualified for that amount....was NOT income to debt ratios. It was due to the fact that they only had enough downpayment and closing costs to purchase that amount of home. Every agent I knew back then (and many loan officers too) would calculate income/expense ratios...and never ever talk about how much money the borrower needed to close. Incredible.

The fact remains true today. You can earn $150,000 a year, have no bills and perfect credit. But if you don't have more than $650.00 in the bank in today's real estate environment...you're probably not qualified to buy a home yet.

Using my scenario, the answers I got from loan officers with experience levels ranging from relatively new in the business to over 25 years were anywhere from $72,000 all the way up to $375,000.

For buyers who qualified for a $189,000 home.

Sorry to disagree with Robert on this one, but NOTHING beats a full blown written approval from an underwriter with NO (or at least simple) CONDITIONS other than an appraisal. And make sure you actually SEE the approval. I've seen wayyyyyyy too many loan officers tell the agents that the buyer was formally approved when they weren't. The lender may have to mask certain information like borrower's income, etc....but they can show you the formal written approval along with what the underwriter's conditions are. They don't like to...but they will.

Dave

ROBERT - You've pointed out the most important part of the equation in this post - the "re-qualification." It doesn't take much for a pre-approved or pre-qualified buyer to become unqualified during the home search process. First of all, the type of loan that they qualified for might end up being eliminated by the bank. This is especially bad news for the marginal buyer. Obviously, "A-paper" buyers will still be able to get a loan, even if the terms are different. Most importantly, some buyers will sabotage their own loan application by doing something that causes a credit score to drop or debt-to-income to rise. You need a trusted lending professional to help guide you through the waters. I've seen brokers cut corners during the pre-approval process, only to have the deal die later on because the people weren't actually qualified. Good post, Robert.

Thanks for all the good information. These days I want them to have all that ready before we go looking at houses.

I give my clients an exact amount they can borrow BEFORE they go shopping...that is the only way to cut down on the fall outs..not to mention upset realtors and sellers.

Great stuff Robert! I missed this initially in Jennifer Alan's blog but she pointed it out since I had made similar (but less detailed) comments. Glad she helped me find this! Glenn

Thanks everyone for the comments!

I still have to say that a GOODpre qualification is all that is necessary for MOST buyers. But the PQ is only as good as the Loan officer that does it. Today's LO needs to go back to the old way of doing business. He/She needs to be able to read tax returns and understand FULL DOC loans. If they know their job then a full approval prior to contract is not necessary... it is nothing more than a waste of time, money and resources. ONLY the "unknown" deals need a full pre approval.

That's my 2 cents worth!

Problem is - even if I trust the mortgage rep who does the pre-qual, what is going to make the listing agent trust them, especially when they have been burned so many times by bad mortgage reps and bad pre-quals? Especially in multiple offer situations, a pre-approval is just so strong. I always use that as my Trump card.

I've seen and heard of a number of deals that have been squashed under changing guidelines. My question to you is, What difference does it make if the guidelines change and the deal is impossible to aquire funding for?

Garren, That is exactly the reason for definition #3, REQUALIFICATION....

If a buyer has an approval or a pre qual, the program may go away prior to them finding a home and they may not be able to get a loan. That is why your lender partner and you together must keep on top of these. Once the buyer finds a property and has a contract, Guidelines can typically be locked in when the interest rate is locked in, that will keep the deal alive... Lenders usually give notice of guideline changes so that loans in process do not die, your lending partner needs to stay as up to date as possible of all changes.

Robert, The thing that is missing in this is the fact that if using an Automated Underwriting System that returns the magic words Accept or Accept Plus or Approved/Eligible. If we have this there is zero reason for the deal to fall apart at closing. I have ranted written about this before and it is something that we should be able to help the Realtors understand. (But if the buyer comes in and then waits 4 months to find a home then we could have guideline changes.) There is no reason to burn an underwriters time if you are getting automated approvals, If you are getting the refer decision then you as the loan professional better make sure you have your guidelines and your ratios nailed and if you are tight you better have your compensating factors or letters of explanation. funny thing is this was the topic of a Realtor meeting today and my feeling and what I said at the meeting is if the deals are blowing up at the table then you are using the wrong loan professional.

This is such an interesting post. Seeing so many differing opinions is very interesting. I would just add to my initial comment, that I am not stating that every deal has to be pre-approved. However as I mentioned before, I believe that the advantage of pre-approving a file is that both income and assets are reviewed, along with any other supporting documents. A good loan officer can take a good application and get a good pre-qualification. For serious buyers who are shopping and making offers I would still state that a pre-approval is a good move. My reasons are: in a pre-qual many times all the income docs are not viewed, all the asset statements are also not viewed. Often its credit review, stated assets from the buyer and stated income or perhaps w-2 and/or 1040 review. Asset statements should always be viewed, large deposits, and other issues can come up if you just ask how much do you have in assets. Also, paystub review is important as well, for 401k loans, or other deductions. While I respect an underwriter's time, I feel it is time well spent to take the extra step to pre-approve the file, for serious buyers. As I stated before the worst case scenario is you have to requalify if significant time has gone by. Further, i would just not that an AU system is only as good as the info put in, so again a full underwrite to verify all of the docs would still in my benefit serve your buyer the best. My final point would be I have found that having a full underwrite done and a full file in a lender's pipeline has helped me to close files, even when guideline changes have taken place that would have forced me to lose the deal.

Again, just my 2 cents. Thank you all for sharing your thoughts.

Colleen, you point about a full underwrite is just not sorry practical. Without an appraisal,contract and title we can not provide you with that and if I sent a file in without this the underwriters would kill us

Joe - EXACTLY. That was my original question... what different levels are there of "pre-approval?"

Jennifer, I know the rules against what I am about to do but http://activerain.com/blogsview/626771/Expanding-the-discussion-of this is my expanding this post and there is a link that leads to this http://activerain.com/blogsview/544321/Tomorrows-Lunch-and-Learn I believe the second just might help

This should be mandatory reading for all new agents. Do you mind posting it to the Real Estate Rookies group?

Congratulations on your "STAR"! Well deserved for a long time (many good blogs)...

Robert,

Isn't that the story today that mortgage guidelines change frequently, actually so frequently that you can hardly keep up with them. Yet, professional LOs are there for the client day in and day out.

Well I am sure to upset a few and it is not my intention, just my opinion and how I operate my daily business.

1-Pre-Qualification ... not worth the paper it is written on. It is merely taking a brief application, talking numbers, and making a guess (not all LO's do this but more than you think). Much of which could change, because the LO did not ask to take a full application, look at credit, review loan options, income, etc. In my time as a LO, this is one of the main reasons loans get changed, rates change, and things blow up at the last moment. I encourage all the Realtors I work with to get Pre-Approvals from a lender they are working with, etc.

2-Pre-Approvals ... if done right, there should be no reason a loan will not close (keeping mind the appraisal, title, etc, issues). If a LO you are working with does not have access to DU/LP is that someone that you want to work with. All LO's (even at Brokers) should have some form of access to this program. Calyx Point has it built in, etc. The Pre-Approval process is actually sitting down with the borrower and exploring their needs vs wants, income, credit history, assets (as a Realtor don't you want to know if they have the money to close, as a LO I know I do ... or know where it will come from), rental/mortgage history. This will allow a LO to accurately input the information and have a decision rendered by the AUS. But that is not all. A good AUS should be read over to confirm conditions that are needed, any red flags that may arise, etc. The Realtors that I have worked with in the past have all said this is what they are looking for. They know that the client has explored their loan options and are ready to look for a property with in a certain range.

Our borrowers, when entered into our system, are sent to a Ready Buyer (no property has been selected) team, that reviews the file, issues an approval based on information that has been provided, and is valid for 60 to 90 days. The file is approved contingent of property, re verification of income/assets, appraisal, title and survey (TX is a survey state).

This was mentioned in another post. If an LO cannot give you, the Realtor and the client a pre approval with in 24hrs or less, than that may not be someone that you want to work with. I agree 100%!

Hope everyone has a great night!

AUG

2008

Jason, Are you actually saying you dont trust your own Pre qualifications?

Even with DU or LP or any AUS.... Garbage in = Garbage out. and most "approvals" are just DU findings not necessarily reviewed by an underwriter... It all comes down to the LO involved in the transaction... Today more than ever you need an experienced LO that actually knows that there is a "t" in the word Mortgage.

As Agents: every one needs to manage expectations. All too often we see contracts not accepted for dumb reasons. Because it is FHA financing, Because it is only 10% down, and because it is a Pre Qualification vs a Pre Approval... As an agent You should only be bringing a QUALIFIED buyer to a home, isn't that part of being licensed? And as a Loan officer I will only take a loan that can be approved. I know that there are many LOs and many agents that dont do things the right way, but that is why you need to build a team around you to make your career a successful one.

What we really need is not "pre qualified" or "pre approved" but conditional approvals. Conditioned on appraisal,title and final review is the best you will get. I do not know of any underwriter that will accept a file without a property, hell you can not lock the loan without a property and until there is a property all you have is a "potential"

I agree with Joe. I like conditional approvals best. One mortgage rep I deal with gives me conditional approvals and I work with the buyer to remove all of the conditions except for the ones like the appraisal and title work so that when I go in with my offer, it is Sqeaky Clean! I always win out in bidding wars because of this. Even if my offer is lower!

All approvals are "conditional"...

It still all comes down to the quality of the information and the quality of the interview done by the LO.

Yes, but it is way stronger to go in with a conditional approval that only has four conditions attached to it than one with twenty conditions attached.

I have seen people offer on my listings with an 'approval' that says verify this, verify that, verify 99 things. To me, that is not an approval.

When I have a buyer strut, not walk, in with an approval that says 'subject to appraisal and title work', that is Golden.

Lisa, you and I agree on most things!!! BUT... an approval is nothing more than gift wrapping, it is not really necessary for the average deal

Okay, lets agree to respectfully disagree on this one. I do agree that on most deals, you are right. However, in multiple offer situations - and I am involved in Several of them each year, I usually win and the reason I am told that I win is because of the conditional commitment. It makes listing agents and sellers feel so much more comfortable. But you are right, in a single offer scenario, it probably doesn't make much of a difference. Although as a listing agent, I too, feel more comfortable guiding my sellers to accept an offer where there is less guess work.

While you are one of the good ones, there are a lot of LOs out there who just spit 'approvals' out of their word processor without having verified a thing. It is an industry problem. But how do we justify the good pre-quals versus the bad when dealing with the listing agent. They don't know you and every Realtor says that their LO is the best on the planet.

Lisa: True, but we all have to "sell" and the confidence in which we present offers is what makes them go, it is more YOUR hard work and dedication to the business that makes your deals get accepted... not the gift wrapping. Dont sell yourself short... other agents in your area know you are professional and full time with this as a career... That is why your offers get accepted, they KNOW you did your due dillegence, and will work towards a successful closing.

Rob, thanks for the compliment :) Now that you mention it, I do have a lot of agents specifically say that they want to work with me - happens all the time, in fact.

Why would I trust a pre-qualification. The borrower has only told me how they make, told me their credit is fantastic, and have no debt. The LO says great here is a pre qualification go buy a house. The borrower comes back the LO puts the application in ... credit is below 600, cannot prove the income they told you, and they have no assets.

Pre-Approvals are more than just looking a AUS, yes garbage in=garbage out. But it comes down to the LO.

I agree about the conditional approval. That is why we sit down with the client go through a full application process with them, offer a pre approval based on our findings and submit the file to or Ready Talent team for a conditional approval.

I do not rely on a system though. Being that I have had great mentors, sat with underwriters for days to learn more, sat with Fannie reps to learn more about appraisals and the business, managers that were once Realtors, etc, it allows me to look at potential loans a little differently.

Hope you all have a great day.

Jason, I NEVER issue a prequal in writing with out seeing credit, NO ONE SHOULD. And I have them at least read numbers off of stubs and w2s... It is about asking the right questions prior to me staking my reputation on something. THAT is why my PQ's can be trusted. I guess I just assume that people are doing things the right way.. But then again, I have 20+ years worth of experience...

I have meet LO's with 20 Years of experience and cannot tell you what the difference between the two. As we all have agreed on is that it is up to the LO to know what is going on. Each of us have different business plans in the five years that I have been doing this, the the Realtors I have worked with all have said that a PQ is worthless to them. They want the borrower to sit down with a LO and do a complete application, look at financial, etc. Actually had a Realtor call me this morning and wanted to make sure the borrower had enough provable assets before they wrote the contract and asking for seller concessions. She knew that we sat down and went over everything in detail as she had asked. By the way the Realtor wrote 4 contracts in a two day period and she will not accept anything from a borrower or lender other than an actual Pre-Approval.

Hope you are having a great week. I am taking the day off as it is my Birthday...well I was going to try, but working on some files that are closing this week.

Happy Birthday Jason!

AUG

2008

Robert... good post and congrats on the feature. I agree, that in many cases, a pre-qual can be just as good. You and I have been doing this for a long time. Even on my most difficult deals, since I know what I am doing, I just give out pre-qualification letters and these deals still close. You made a great point. A very good loan officer asks the right questions. So many forget to ask about child support or alimony. I once had a woman tell me that I was asking to many questions... lol That the other 4 loan officers were very quick in asking her questions.

@ Joe Adams... I semi disagree with your statement that a loan that has an approve/elligible has zero reason to not close. How about inputting the wrong information and once reviewed by the underwriter, could come back as a refer. rut row....

Overall, there are to many loan officers that just don't know what they are doing. I have closed 8 loans just this year that were qualified or approved that never made it to settlement with the other lender. As Robert stated, it comes down to knowledge and yes, experience in some cases. The main thing that I see that so many loan officers have problems with is reading credit. And not cleaning it up accordingly for it to get an approval. good post...because so many get these both confused and many loan officers use the word pre-approved very loosely as mentioned.

jeff belonger

Great point about Jeff about using the word pre-approved! It is used to many times when the LO has not even taken the time to figure out how to spell mortgage.

Hope that everyone has a great weekend.

What a great post! You know it's good when it spurs such lively debate/differences of opinion. The initial point of the post was to explain the difference between pre-qualification and pre-approval. My experience is that most realtors, and certainly most customers, think these two are actually the same. I've talked to customers that had a generic, automated quote from Lending Tree and thought that was an approval.

In every case, I believe it comes down to the loan originator. A good loan officer will take a complete application, ask the right questions, and know up front if there are going to be any issues. Barring a problem with title, appraisal, guidleine changes, or something unexpected (borrower getting laid off), any loan officer that belongs in this business should know right away if the deal will close.

Of course there are still quite a few LOs out there that should not be in this business (although the number is shrinking everyday). If there is any doubt in the realtor's mind, they should pick up the phone and test the LO about the pre-qual or pre-approval. The LO cannot release specific info about that particular individual, but you certainly can test them as to what steps they took before issuing that piece of paper you are holding.

The difference between the two(IMHO) can be a headache. I'm not a lender but being a realtor we're stuck in the middle. So my thought is to make sure they are ready to purchase well before i write an offer. That being said i work with lenders who i know will do the job.

Here's an interesting challenge for Loan Officers and Realtors (it obviously makes much more sense for Loan Officers to know these answers)....but I know wayyyy too many Realtors who think they can pre-qualify accurately...and I'm not sure that's true.

1.) Mrs. Buyer works as a nurse. She makes $18.00/hour....and has worked overtime consistently for the last 8 months. How much income would you use for her in qualifying?

2.) Mr. Buyer pays child support of $300.00 per month for two children. The kids are ages 17-1/2 and 12. The older child does NOT plan on going to college, so how much child support do you need to count against the borrower for qualifying?? Secondly....do you deduct it from his qualifying income and then run ratios? Or, do you lump it in with car payments, etc. as part of the total debt ratio?

3.) Mr. & Mrs. Buyer own three rental properties. One is rented for $1,200/mo....and has a mortgage payment of $800.00 One is rented for $950.00/mo. and has a mortgage payment of $800.00 The third property rents for $1,500/mo. and has a mortgage payment of $1,100.

a.) What questions are you going to ask in this situation?
b.) Is the math calculated on net? For example, since they're in a positive cash flow situation on all three properties...can you simply offset the income by the payments and use net profit as income?? Or are you going to add all rental income to regular income...and all mortgage payments to their regular debt for qualifying?

Note: These are everyday scenarios seen in the lending industry. As I mentioned above in one of my comments, I used to test Loan Officers during the recruiting process to get an idea where they were in terms of knowledge. Rarely did the loan officer get the answers to these types of questions correct. And I'm not sure all loan officers actively participating in this post will get them right either. PLEASE do not take that wrong!!! This is intended as a learning exercise for all...NOT a way to show who's wrong.

So...is anyone up for this kind of exercise?? If so...please list whatever questions you might ask during the prequal...and what your answers would be for each question above in terms of how to approach the resulting information for income and debt purposes.

Have fun!!! Let the games begin!

Dave

AUG

2008

Jeff, Thanks for stopping by... It appears that we think the same way on the subject!

Karl, You also seem to have the same ideas! I guess we all must be old timers!

Robert, You hit the nail on the head, you need a trusted partner, now more than ever! You need some one that truly treats this as a career and some one that cares about the client, and cares enough about their own reputation to be sure they are doing the right thing. It is not about the box of donuts, it is about how your lending partner makes you look!

David, I deal with that "stuff" every day, (I know that jeff does, and it sounds like Karl does too) and I wont take a loan or write a pre qual letter with that basic info, For the rental income... I would need to see the Schedule E to get the real numbers. For the nurse, I would use base income and depending on loan type etc I would consider the OT as a compensating factor... For the Child support I would need a little more info, and first be conservative and if they qualify with the full ammount I wouldnt worry... Always better to be conservative in that scenario, and you can also get differing opinions from UW's in some Child support issues. Thats one that may need a call to an UW if you have not run across it recently. But NONE of the above requires a full approval prior to finding a house. it is OK to say "I dont know, let me check on that" and if a LO doesnt ever say that, they are shooting from the hip.

Thank you everyone for the lively discussion!

Robert - the last part of your repsonse to David is my favorite. Though I constantly seek avenues for continuing education and attempt to stay up on the latest guidline changes, I know that I'll never catch everything. I work in a fairly large office that happens to be in my company's corporate operations center. I am fortunate to have quck access to a team of underwirters as well as an entire department dedicated to product development. On the occassions that I come across an issue that I have not faced recently and there may be some question, I have no hesitation in letting the customer or the agent know that I don't know and will verify the answer with one of my resources. Many loan officers are afraid to say those words as they fear looking incompitent. Unfortunately, this often will just lead to bigger problems down the road.

Once again, it is just a matter of having the right LO.

Exactly Karl, I learned a long time ago (1987 to be exact) that it is OK to say "I dont know"... Back in the days before the internet and electronic guidelines, when we had the fannie mae guidelines that looked like phone books.... I called an underwriter at Fannie Mae to ask a question... and they said "I dont know, let me get back to you" and a little light bulb went off over my head and I realized it is ok to not have every answer, providing you were the resource that knew where to go to get the answer ... It is common sense.. but then again... not everyone has common sense!

Rob, After reading so many of your comments I really want to compliment you on being a true professional. I am honored to be doing business with you!

Rob,

You're absolutely hired!!!

Thank you for not feeling "put on the spot" with my little exercise above. I was curious to see if anyone was up to the challenge...and you were!

Here are some more thank you's:

1.) Thank you for knowing to ask for their Schedule E!!! I know, based on your experience, it's a no-brainer. But for all the Realtors reading this post, you wouldn't believe how many loan officers wouldn't know to ask!

Schedule E will show tons of information in order to determine USABLE income. It'll also show that the buyers in my example above only owned ONE rental at the end of last year. The other two were just bought in the last 90 days...and therefore become REAL sketchy on whether the income can be used or not. The only thing saving these borrowers in this particular situation is the fact that they appear to at least have a history of owning rental property, so the underwriter MAY allow the income...but I'm not sure it's absolutely set in stone.

2.) Thank you for not automatically using her OT income for qualifying. Again, for the agents reading this...wanna know why you hear about loans failing at the last minute??? It's because there are loan officers (tons of 'em) out there who will use ALL of the overtime income for qualifying, no matter what. If that amount is $800.00 per month...the loan officer may be over-qualifying your buyers by an additional $40,000!! When the loan gets to underwriting...POOF....denied.

3.) Thank you for approaching the child support the way you did. Again, many loan officers will decide themselves to eliminate the child support for the older child in the above scenario. But if the divorce papers show that child support continues if the child goes to college (which they often do) the undewrwriter will not eliminate the debt based on some letter stating the child doesn't INTEND to go. He/she could change their mind, etc. And Rob had the perfect answer.

Here's the deal.

If you're not making sure that your loan officer has Rob's abilities and qualifications, you're simply taking on too much risk in your real estate career. And no...Rob and I don't know each other at all. This was not intended to give kudos if/when undeserved. But...I'd use Rob as my loan officer any day!

Great job...(and sorry for hijacking your post a little).

Dave

Thank You Dave... (whew, glad I passed!) To me the above are pretty basic "stuff" but I also gre up in the business prior to having any "no-doc" loans and back in the 90's no docs came and went so I never forgot how to qualify. It just seems to be the right thing to do, its better for the lender and MUCH better for the buyer, to be sure they can afford their home. Even simply asking the question "where would you be comfortable with a monthly payment" can give you a lot of insight to the buyers qualifications/tolerance for payment. But not many people ask that question... and it is an important one. I appreciate the compliment Dave.. and I hope all agents reading this have the right lending partner to help them along to a successful career.... and if you dont...... You really need to put that on the top of your to-do list. this market of ever changing guidelines, back to basic qualifications, FHA/VA etc.... REQUIRES that you have a lender that knows the above information.

I was a little concerned about your hijacking at first... But we were on the same page and you got my point across too... You were saying the same thing I was... but sometimes a different way of saying it helpst to make a point! Thank you for your comments.

As a Realtor, one of the first questions I ask is what monthly payment someone is comfortable with. When people say that they are looking for a 300k townhome, they often don't take into account how much taxes and homewoners association fees are. Once you explain the extra costs to them, you may find that they are actually looking for a 220k home.

Sometimes they get upset when you show them what they can afford in their price range because they say 'Well, the other Realtor was showing us homes in the 300k range and we don't like anything in the 220k range'. That means that the first Realtor did not do their job and ask the right questions. So it all goes back to one of the main topics in Rob's post which is asking the right questions upfront so no one is disappointed later. Of course they are going to like the 300k house better!

It makes no sense to show people what they can't afford or what they are uncomfortable trying to pay for. I know so many Realtors and mortgage reps who in this situation will try to 'push' buyers up to the price that they want to spend and who often try to get the buyers to then go stated to make the numbers work. But that still doesn't change the fact that they can't afford the house! I'd much rather see them in a house that they can comfortably afford now and not see them become a statistic later.

Rob,

You seem to do a very thorough prequal. The problem is that most people don't. The point that some are arguing for pre-approvals is that at this point everyone involved in the transaction would be on the same page.

I wrote a post about this previously which explains my point further rather than repeat it here.

http://activerain.com/blogsview/582291/Pre-Approval-Letters-Are

Michelle

Michelle, I both agree and dissagree with you. Most "pre approvals" are just DU findings that have huge room for errors.... the old garbage in-garbage out scenario. and approvals are a waste of time and resourses that could be used on real loans. NOW more than EVER, realtors need to work with trusted lending partners. anyone that allows an agent out on the road with out asking the right questions, let alone put it in writing in a letter.... JUST DOES NOT BELONG in our business. This is my career, I take it very seriously.... My word and my reputation is what feeds my family and that is the way business SHOULD be done!

SEP

2008

Yes there is a big difference !

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