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Is the Letter From the Lender any Good?

A regular topic in our business is the quality of pre-qual and pre-approval letters from lenders. This has been a serious issue in several of transactions. I have gotten to the point that a letter from certain lenders is worthless in my opinion; while others come from true professionals. I give a sigh of relief when an offer comes in with their letter attached.

Why is there such a difference from one loan officer to another?

Let's look at a few of the issues:

To get a mortgage license in our state you pay a few bucks and you are licensed loan officer. No training, no experience, just pay the fee. There are tons of folks walking around that have no clue what they are doing.
The lending side of our industry appears to be the Wild West. They have no association like our Board of Realtors with an ethics code and enforcement.
With so many people wandering around with licenses and the B/C side of the business tightening, many agents are getting desperate for business.

I have seen letter from mortgage brokers that say they have a fully pre-approved mortgage, to later find they never even pulled their credit. It happened again yesterday.

In this case it was a new client of a new real estate I am working with. The loan officer was a personal friend of hers. She pre-qualified the clients for $500,000. In Hawaii that limits the selection for a single family home. With a pre-qual and budget in hand we take off to look at homes. The buyers found a dream home they liked and decided to present an offer on it. Not so fast, the listing required a pre-approval letter from the funding lender. We get the loan officer on the phone and tell her what we need and asked how quick she can get that. We got our answer first thing in the morning: NEVER.

Let's review the damage:

We just wasted the buyer's time.
We wasted our time.
We broke the buyer's hearts after finding them the one in million.
We did not look very professional in anyone's eyes.

It was a learning experience for the new agent. I am sure she will never forget it.

Posted by Randy L. Prothero - Hawaii REALTOR® on 04/03/2007 01:11 PM

Comments (67)

mortgage, prequalification, prequal, preapproval, loan, hawaii, mililani, century 21

Originally posted at: Hawaii Randy's Real Estate Opinions: Is the Letter From the Lender any Good?

This post has been included in Hawaii Information

67 Comments on Is the Letter From the Lender any Good?

APR

2007

That makes me mad, since the buyers did what they were supposed to do, and in the right order. Guess that 'friendship' is ruined.

I am sure the agent will be much more careful when giving a referral in the future. I just feel bad for the buyers. Like you said, they did what they were supposed to do.

Randy: It's always a kicker with those certain "friends" of client's. (these are the ones that rip them off...the ones that give them the "greatest" loan ....) Some friends. So....are you still waiting or referring them to a good one?

This is a common problem in the Mortgage business. In NC, it is not as easy as paying a few bucks and hanging a license.

In general terms, a pre-qual is usually based on verbal information (income, assets, expenses, employment etc.) and a credit report. Anyone giving a pre-qual letter without a credit report is doing a disservice to all parties.

A pre-approval letter is usually based on an underwriter reviewing an application and supporting documents (pay stubs, tax returns, bank accounts etc.).

There are still deal breakers that can be thrown into the mix but in general terms - work with a reputable loan officer and you will save yourself and your client a lot of heartache.

It's hard to tell these friends that they should go with someone else or steer them away from the lender THEY picked. In Hawaii, you wouldn't believe the variety of ethnic people we have. Some who are new to the islands stay with their own culture thinking they will be taken care of. They don't realize that they can get a good referral for a reputable lender elsewhere besides their "friends" and don't realize that they will be taken advantage of just for that fact. But....it's the client's who have to choose, right?

That is rough, Randy. To many in this business just throw files against the wall and HOPE it sticks.

Celeste - They are probably burned out from the experience and do not appear to be credit worthy for what they want.

Ronnie - I try to get all of my clients to do a pre-approval with docs. It makes everything so much cleaner and easier.

Celeste - I have found the best practice is to always keep business, business. When dealing with friends I do everything as professional as possible. I would hate to lose a friend over one piece of business.

Dennis - I believe that many are week or inexperienced and will say literally anything to get the client. Then later try to make it work.

Randy-That was a good learning experience for the new agent. I had a buyer last year that came to me with his own lender who was "a friend of the family". After we found a home to put in an offer on, I asked the lender to CC me on the GFE. I took one look at it and almost fainted. My client has perfect credit 770 as a score and no issues. He is active duty Army and was using a VA. The lender quoted him 8.0% with 2 points and the sellers agreed to credit 9k for closing costs. He was also informed that he would need to bring an additional 4k to closing. I quickly got him out of that mess and he was ever so grateful. He ended up with ZERO out of pocket expenses and a great rate. Just goes to show what "true friends" will really do for you. Aloha!

But this wasn't your friend right? I was saying that the client had a friend who is a "loan officer". But they chose their friend. Bottom line is that they do not qualify and this loan officer wasn't doing them any justice.

Ronnie is correct. There is a difference between a prequal letter and a preapproval letter. To say the customer was approved without even pulling their credit is just absurd. When getting verbal information, make sure the customer knows they have to PROVE their income and assets. NEVER use a credit score the customer THINKS they have. I've found that the people that think they might have a few blemishes is a 700 score, and the person who says they have a great score is usually about 500.

Sorry for the waste of your time. Hopefully you will find a loan officer that does his or her job.

As a matter of professional practice, unless the buyer comes in with a preapproval letter or letter of loan commitment from an established lender, I will usually ask them, as a courtesy, to speak with a lender that I know in order to discuss their options and compare. Usually this catches anything that may be out of wack since my lender will report back to me regarding any issues, etc. Sometimes they work with my lender, sometimes they stay with the other lender but I am able to "parallel track" loans from that point forward. If something goes wrong with one, we have the other one for back up. Once a client with terrific credit wanted to work with her cousin, who got let go from his job part way through the process. My lender was able to step in and close the loan without missing a beat.

This is why I work only with my perfered lenders. I know the letter is actually worth something!

Randy it is my experiance there is no "Approved Letter" from the lender or mortgage broker. Only pre-qualification and pre-approved. A vast difference to TOTAL approval. there are to many issue related to getting final approval that the Pre-conditioned letters do not cover. However I entirely agree with Ronnie Roach above.

Randy-

I agree that these "letters" often do not mean much. They are nice to have in hand but in reality, deals fall apart all the time when a "prequalfied" buyer loses their financing. What recourse is there at that point? Really too bad for the clients -Good post: )

A Letter of Loan Commitment, unlike a preapproval or a prequalification letter is a real commitment to provide a loan. Credit has been reviewed and the lender deems the individual worthy of a loan. I first came across these when a bank appraiser for WAMU came in the door with one. Be sure to review this with your loan officers or a local bank if you do not know what these are and their significance.

I offer a service to my listing agents where I will call the lender/broker that gave a pre-approval letter to verify exactly what they have done and what kind of loan the borrowers are getting. It is not foolproof, but it gives the listing agent, the seller, and sometimes even the buyer some peace of mind.

There are many "Senior Loan Officers" out there now that have never closed a purchase transaction before.

Randy, Hate it when that happens. I get crap for pre-approvals all the time. Of course I get full blown commitments letters from the lender that are worthless as well. It is very frustrating.

Sorry to hear about the bad experience...

In my case, my "pre-qualification letter" staes on it that I HAVE pulled credit of the client, I HAVE verified their job and length-of-service, and that I HAVE verified income & assets. I have never had a problem in 7 years of a Realtor not accepting that letter....but that's because I do verify what goes behind it.

As many others have mentioned, sadly, many loan officers do not verify anything.....

Randy,

Great story, great points. My comment would have been too long so I placed a blog post on this here.

Thanks,

Shailesh
azmortgageguru.blogspot.com
aimeeloans.com

It is such a dis-service to a buyer when a loan officer fails to do their job. I know the lenders in my area that do it right and I am so thankful when the buyer makes a good choice.

I agree, sometimes the pre-approval letters are not worth the paper they are printed on. It's not a done deal until we get loan commitment, and sometimes not even then.

Happend just the other day!

Randy my friend....great post. There is a huge difference in lenders. I have used the same title company and same mortgage lenders for years. When our market literraly exploded in 2005 I was bombarded my mortgage brokers wanting my business and could not understand why I would not give them the time of day. Needless to say I can count on my mortgage lenders to never deceive me or my clients. It has paid me big dividends. Have a great one Randy.

That is a shame, I make it a habit when I send pre-approval letters I verify everything like Loren does. My letter also states what I have verified and where the buyers are in the process. I gotten my butt bitten before so now it's standard practice for me. When it comes to friends and family it seems to me that it's even more important to provide exceptional service. Haveyou referred them to another mortgage broker?

Randy,

Great post! It sounds as though some legislation and licensing procedures need initiated in Hawaii. Its not quite that simple here in Florida but it still could use some improvement. Given the nature of the real estate market as well as the day to day upheaval in the mortgage industry (subprime and Alt-A to a lesser extent) realtors need to get much stricter with what they expect in the way of a pre-approval letter and hold mortgage brokers/loan officer to task in providing and excellent quality letter which includes letterhead, no cookie cutter/generic appearance. The borrowers name, loan type, % of financing, documentation type, etc. The letter should state that the broker/LO has provided the letter after a review of Employment, Income, Assets, Residency and Credit. If seller concessions are required than that should be noted as well. the letter should appear that some thought was put into writing it!

David - With friends like that who needs enemies.

Sally - It was a friend of the new agent, I should have corrected that before. The client was also a friend of the agent's family. The loan officer didn't do anyone any favors.

Michael - This is a great example of the difference between a funding lender and a broker. The broker pulled credit and met the buyers in their home to get do an approval. Unfortunately when I asked for a pre-approval from the the funding bank they said said no way!

Irene - I prefer to follow-up with the loan officer. I have never thought of parallel tracking.

Todd - I too avoid Bob's mortgage service or ABC lending, insurance and car repairs.

Danny - I try to get all clients to get a full pre-approval. It makes them so much stronger to the buyer when we submit that offers.

Kelli - I tell clients that nothing is ever guaranteed, but we should always control what we can to minimize surprises.

Irene - I think we are talking the same thing. We consider what you call a commitment letter a pre-approval with full docs. The conditional loan approval or commitment letter usually comes during escrow when the lender is ready to fund subject to a few last conditions like updated docs or the termite inspection.

Michael - I have seen every title on loan officers from Senior Loan Officer to Vice-president. If it is a major lender the title may mean something, if it is a mom and pop broker it means nothing.

Bryant - There are lenders who's letters are only good for toilet paper. On the seller's side it can be really frustrating. They want us to take the home off the market while they wander around in the dark trying to figure if they can really buy the home.

Loren - You are describing a pattern of professional behavior. Congratulations! I would like the lender industry take a more active role in professional development so that the standard be what you practice.

Shailesh - That is a great post. It is very informative for members of the public and new agents. Thank you for sharing.

Irene- some states such as NJ require that an appraisal be performed prior to issuing a commitment.

Gary - While visiting my brother in Missouri, he shared the story of a loan officer in his area. He was rotten at what he did and dishonest. In a previous transaction he caused harm to one of his clients. One day a buyer came to my brother that had chosen that loan officer. He gave the buyer two choices, a different loan officer or a different Realtor.

Tim - I have seen out of state lenders pull final commitment letters and change the terms at the last second or even after they blew the deadlines. That includes a couple of major lenders that you all know.

Neal - I bet that made you day.

George - It takes a lot to be on my Services Directory. Not much to be dropped. Those who take care of my clients gain my loyalty.

Angela - If they decide to try again it will be with a funding lender, not another broker.

Ron - It is tough, by law we have to present all offers immediately. So no matter what is in the listing the buyer's agents can offer literally anything. If you make the remarks in the listing too draconian or too different form the others you may scare away solid buyers.

Randy, a couple of suggestions:

1) The name of the mortgage company is less important on this issue then the quality of the loan officer. Interview the LO and don't assume that because it is a company you haven't heard of the loan officer is worthless and for that matter, don't skip verifying the validity for a lender with a "household name".

2) The location of the loan officer to the closing has no direct bearing on the accuracy of pre-approval or accuracy of quoting closing costs. However, it does have an INDIRECT influence because the loan officer may or may not know the local closing costs, taxes, title transfer fees, etc. Again, an out-of-state lender who lived in Hawaii for 4 years doing loans and relocated to California can be just as accurate as a local lender who is not honest or clued in. Proximity isn't everything....interview the loan officer.

3) Lastly, understand that as loan officers we are limited to the information given us by the buyer. If I verify 9 out of 10 items for a client I feel pretty good that they qualify but if that 10th item is something they lied about or mis-stated to me, it could change their pre-approval. For this reason I try and meet my clients in person and give them very complete expectations of the paperwork and documents we need to pre-approve them. That still doesn't mean that during the process we learn some new "nugget" that totally re-shapes the transaction.

Great post. I gave it a 5!

Michael - State by state and even company by company things vary.

Ken - Thank you for the kind words. I agree the loan officer is the key thing here. There a great companies that have agents I would avoid.

There are many problems with out of state lenders. (Let me mention we are in Hawaii, so out of state does not mean 20 miles away). They do not know our laws or contracts. The have no on sitting at the signing table to explain what they are signing. They never seem to have the same sense of accountability or urgency. To date I have not seen one transaction go smoothly with an out of state lender. I am not saying it couldn't happen, but would you want to try it with odds like that?

I believe that lender's letters are very helpful. In fact, an offer in my market area without a lender's letter will go no where.

However, there are letters and there are letters. I won't present with a letter unless it had three items.

1. Review of credit report
2. Verifications of income to qualify
3. Money to close

If the letter has these three things and is on letterhead and signed, it's fine.

Anything less, back to the lender. Lender won't cooperate, I take the buyer to a known trusted lender. Buyer doesn't want to change lenders to get a good pre-qual letter, they will have to find another agent.

It's so easy.

Lenn - That covers it. We need more agents like you.

True there are a wide range of "professionals" in every business. Sometimes when I have a pre-qual from a new source I will give them a call just to chat. You will quickly get a sense of how much preliminary work went into the letter and can suggest they do a little more if needed.

Dan - I have had loan officers out right lie to me in a couple of occasions. I had one that they said the client had good credit. They failed to notice the bankruptcy and the low credit score.

Randy:

Very nice post....it relayed everything I have experienced when dealing with these types.

I wrote a blog not too far back about the importance of making sure a pre-approval is still valid in the current deteriorating subprime/alt-a mortgage climate: http://activerain.com/blogsview/55651/Do-Yourselves-a-Favor

In my opinion, these letters are almost completely worthless. I have received poorly written letters from lenders I have never heard from and the deal closed. Conversly, I have had deals blow-up when I was working with "high-end" and highly respected lenders. But hey, this is why you don't count the commission until the deal is closed. You can only truly judge the quality of the letter and the lender when the deal is done. If it closed then you consider working with them again. But I never give a lender a second chance once they screw up one of my deals. Fool me once shame on you, fool me twice shame on me.

Randy,

I agree that it is happening more often than not lately. You would think the lenders would wise up. I know in my book- when a lender wastes my time- I won't send them anymore clients. If they can disregard my time, my clients time, even the seller's time when they have to leave the house. It is a pain for everybody. I lost a deal the day before closing because the lender wrote down child support that was paid out as income- my clients lost 2,000.00 after earnest money, inspections, appraisals and surveys. That was 80 hours and countless gallons of gas out of my pocket. The astonishing thing is that the lender continued to call me for referrals. I guess they just don't get it.

Shanna

I actually had someone write into special provisions that my buyer had to use an in-town lender. In principle I agree, I like to be able to know where my loan is coming from, but it just seems tough for all the lenders that really do a good job, like our fellow AR members....

Randy, I did not read all the comments and hope that I am not repeating something already said.

My opion as a Loan Officer who takes a lot of pride in the quality of the Pre-Approval Letters that I give out, is that every time some clown like this does this, their name and what they did should be shared with all the other Realtors in the Office as well as with all other Realtors you know!!!

There were so many responses I may have missed this but make sure it's a LENDER generated letter and not a BROKER generated letter. If they can't write the check, they can't write the letter - we see this a LOT where a broker will issue an approval letter (commitment to lend) when they don't have the authority or power to approve or commit.

I love it when realtors in other cities tell me how bad of experience they have with 'out of town lenders'

i quickly point out that in my eyes, they are 'out of town realtors' and that I have had similar experiences with them. This either breaks the ice, or turns them frosty..... ;-0

Ken Stampe is 100% correct. It is not the name at the top of the letter. It is the loan officer name at the bottom.

And, in my state..... you have to take classes and pass a test to be a broker, whereas a banker doesnt. Strange.

My suggestion to ALL realtors: Take a 'Mortgage 101' class at your lenders office.l We offer them.....
This will make you more knowledgable about lending, and what questions to ask. It might not cure ALL of your problems with bad loan officers.... but it may help.

Great post, Randy

Randy... great post. We will be seeing more of this. But what I don't get is that credit wasn't even pulled??? That is beyond lame. How could one even think that this is okay, giving a letter without even looking at credit. I so hate losing business to people like this.

Tom.... you hit the nail on the head, that it's the loan officer and not the lender's name. You still need to know what you are doing.

Randy... I hope this is okay to leave in here, but I think it fits well with what you are talking about. Just let me know.. As PROFESSIONALS, we need to RAISE the bar & educate consumers.........

Tom - now, now....don't try thumping that broker education drum at me. I teach that course and it isn't any harder to get a driver's license in Texas then it is to get a mortgage broker's license. You brokers have oversight from one entity down in Austin, TX and us bankers have.....let's see.... the OCC, HUD, FDIC. When I started with Bank of America they put me through about 40 hours of training on compliance, ethics, federal regulations, etc. so just because I didn't have to take the state exam doesn't mean mortgage bankers don't know what RESPA or ECOA is.

Ken..... ECOA? Sounds like a sickness or some type of snake.... lol I worked for a large lender one time, that we were a true banker, one who serviced our loans and we went through some of the same things.

Ken... one thing though... don't forget, brokers can be a banker also. They just don't service their loans, they sell them off. Just throwing something out there..... the overall thing, education, education, education.

jeff belonger

APR

2007

Celeste - Mahalo, We have all lived it.

Michael - That is a very good point. With the B/C lending tightening up the pre-approvals may not still be good for some clients.

Matt - If they mess my client up, NEXT!

Shanna - They don't get it? As in, they don't understand or they don't get the referrals? LOL

Chris - I recommend to my clients to use a local lender. We are in the middle of the Pacific. I have never even seen a smooth transaction with an out of state loan officer. I am sure it is possible for it to happen, it just hasn't.

George - The list is so long we will never remember them all. I also have a list of Realtors; fortunately it is a little shorter.

Ken - That is how we found the problem. We asked for the pre-approval from the funding lender.

Tom -. I agree all Realtors should get some basic training on mortgages. But not enough to make them think they are loan experts.

Jeff - I loved your blog and thank you for the great feed back. Beyond lame is a perfect description of what happened.

Ken - A couple of bucks and you can get a mortgage license here. I think there should be some reasonable education requirements to handle transactions of the size we are dealing with. It is not fair to the public that someone with no training can get a license.

Jeff- I think just about all of the mortgage banker here also brokers.

Randy,

you bet it made my day, maybe if we start to enforce the contract clauses about commitment dates,progress of the loan process, closing dates, we would either be putting more pressure on the lenders not to wait until the 12th hour to tell us there is a problem, they need to be regulated, not just to protect their industry, how about the sellers? What are they supposed to do after waisting time off the market?

How about putting a buyer out on the street? The problem is that it is easy for the lender to get the buyer out of the deal with just one denial letter, it goes on all the time and when it is a friend, it is easier,it should be illegal for them to base approvals just on a possible false application.

My inlaws tried selling their house in NY,the buyers application was falsefied, said they paid taxes when they never did.

If I see one more pre-approval....I'll scream!, I just had a full commitment letter, then the buyer walked.....do we need to keep collecting escrow and going to court? I guess now we need to figure a way to protect everyone from these bogus lenders.

Randy, I had no idea that acquiring a mortgage license requires no formal training! Now some things in my past make some sense!
I feel so bad for your buyers, I have seen pre-approval letters come through the fax all the time, but when it comes down to actually getting the loan when the buyer finds the perfect home, you're right a waste of time. They should be done away with.

Neal - I am not sure there is any answer short of more government involvement. I am shocked I said that. The only other answer would be long term. That would require the lending industry to form an equivalent to the Association of Realtors with an ethics code and standards that they all subscribe to and have recourse for injured parties.

Lysa - That is why as Realtors we are doing our clients a giant favor to keep a list of good solid professionals from several companies that they can feel safe going to. I think in the future I will also give a copy of this blog to my clients so they can not only read my comments but those of professionals from around the country.

Ken

I agree with Jeff.....

I think you are trying to confuse us with a bunch of fancy acronyms.....

;-)

Randy, I agree..... your lender needs to know what they are doing. And YOU need to know some of the vernacular used in kending so you can sniff out the bull****, and ask the right questions.

so...who's on first? lol Randy, yes, I think many of the lenders on here are a banker, but sell their loans. But they would still be considered a banker. A true broker doesn't fund their own loans. Good post...

jeff belonger

APR

2007

Tom - I agree completely. One of the things about working with pros is that they train their customers. The loan officer that get the most business from agents are the ones who train the agents.

Jeff - I prefer to work as much as possible the agents who can walk in the next room and speak to the underwriter. If there is a problem they catch it much faster and save a lot of grief for everyone.

APR

2007

Hi Randy,

Thanks for sharing your thoughts. I can understand the Realtor's point of view as there has been times I've had to repair the damage from a rookie Loan Officer to save a loan. You do make some good points, but as a Lender myself I would like to share our/my side on some of your issues:

1) To get a mortgage license in our state you pay a few bucks and you are licensed loan officer. No training, no experience, just pay the fee. There are tons of folks walking around that have no clue what they are doing. Yes, there are tons of folks walking around making the rest of us look bad. From not being trained, to being to greedy with charging points, there are some bad seeds out there. But there are lenders who only hire experienced Loan Officers, and there are lenders that send Loan Officers to the mainland for product and sales training including exams and role play scenarios. Additionally, the companies I have had experience with holds a weekly or monthly ongoing training, including having Realtors and Escrow/Title companies coming in as guest speakers.

2) The lending side of our industry appears to be the Wild West. They have no association like our Board of Realtors with an ethics code and enforcement. We have 2 association locally: Hawaii Association of Mortgage Brokers and the Mortgage Bankers Association of Hawaii. Probably not yet as large and proactive as the Board of Realtors, but we're getting there! The major banks/lenders locally are part of these associations and are working hard to keep things clean.

3) With so many people wandering around with licenses and the B/C side of the business tightening, many agents are getting desperate for business. I totally agree with this. And this market is already squeezing out those "predatory" Loan Officers who aren't doing their jobs correctly. Good Loan Officers will sustain business no matter what the market is.

Just like any type of service you look for, always look for an experienced person from a reputable company. Just as you would looking for a Realtor.

Thanks again Randy!

Pete

Aloha Pete - I see you are with Charter Funding. Your company is on the short list of companies I recommend to clients. Several of your agents are regulars in our office. Cean did a wonderful VA presentation to our office yesterday.

Aloha Randy - That's good to hear, thank you for your continued support! I am new to Active Rain so I also appreciate all the blog postings you have had... very informative. Keep them coming!

Pete

Pete - Happy you joined the group.

Randy, I agree that the pre-approval letters don't mean much.

Randy.... I am going to jump back in here again. I hope you don't mind this, but I did a blog on the difference over a week ago. The difference between a Pre-Approval and a Pre-Qualification letter.

In my opinion.... if you have been pre-approved, you should get your commitment letter and not a letter on letter head, stating that you have been approved. Sure, it looks more official, but it doesn't tell me that an underwriter viewed it.

On another note though.... what's scary is, some commitment letters are worth the paper that they are printed on. I have actually seen loan officers forge these and several can print them from their system. And many of them don't even get signed when they are approved. Well, not maybe many... but I have seen some.

In any case... it's scary what to believe at times. Good post.

jeff belonger

Greg - I juts had a loan officer in my office a few minutes ago. This was our very discussion. If I know the loan officer and his company and know how they do business, I may have a lot more faith. If it comes from Mary Beth's mortgage and hair styling and is typed on here letterhead. I am not likely to take it serious. If my buyer walks in with that letter, I get him to a reputable lender for a full pre-approval with documents.

Jeff- Absolutely, I want to know that underwriting has reviewed it.

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