Could one say that the sky is falling?
There has been a major discussion whether or not Pre-Approval letters will be like dinosaurs, extinct. It was started with this post by Marilyn Boudreaux - Pre-Approvals Disappearing? - It was then followed by Lenn Harley's post, Calling all loan officers on Active Rain?? What are the facts here?? No Pre-Approval letters??? - After reading every comment on both posts, it sounded like some realtors just wanted to walk the plank per se. Some mentioned that Pre-Approval letters aren't worth the piece of paper that they are written on. So I wanted to set the record straight and give some insight.
In regards to both posts and the comments, I think some seem to be losing focus on what we should be paying attention to. When writing a blog post or comment that is of opinion, some people will read it as if it's factual or correct. This is sometimes why news is misleading or incorrect. And I read several comments by loan officers that were just wrong. Some of them are lender overlays and nothing more.
Some other comments to nibble on :
From a real estate agent - "I definitely require a pre approval letter - make darn sure the loan commitment is in 15 days and financing contingency in the contract is off - buyer's deposit is on the hook - sorry"
Me? A loan commitment in 15 days? This is to include weekends? It's just not that easy anymore. Gerry Suarez talked about these so-called 10 day closings. I can close a loan in 10 days or less. Also, some commitment dates be unreasonable. What is a reasonable commitment date?
From a real estate agent - "I am at a loss. Sellers are still expecting "pre-approval" letters, and are not willing to go forward with a "pre-qual" which is considered useless."
Me? Here is a Call to Action to all realtors. Educate your sellers properly. Give them the facts about the real differences. Sure, there is more curb appeal when you say "Pre Approval". A good loan officer's pre qualification letter should be just as good. More later.
From a loan officer - "I think that defining the difference between pre-quals and pre-approvals is important. I view a pre-qual as taking an application and getting an automated approval. I view a pre-approval as the pre-qual plus validating income, assets and etc. I then have another category for a pre-approval with an underwriting decision...(more was stated)"
Me? The first sentence is right on. But it sounds like this person has Pre-Approval A and B. A real pre-approval should be fully underwritten. Please read below.
Pre-Qualifying Letter vs Pre_approval Letter
What I want to focus on is the difference between a Pre-Qualification Letter and a Pre-Approval Letter.
Pre-Qualification Letter -
The loan officer should be pulling a credit report and inquiring about income and assets. They should go a little further and ask some important basic questions such as time on the job, rental history, etc, etc. Jeff Belonger's questions for a pre-qualification of a mortgage.
Pre-Approval Letter -
The same thing that was done with the pre-qual situation, but that you also take a full mortgage application and collect income and asset documentation. Not only should you be running this loan through AUS (automated underwriting system), but an underwriter should be approving this also subject to the appraisal and title. What happens is that many loan officers just run the loan through AUS and if they get an approval, they then hand out a Pre-Approval Letter. One can argue on opinion that you can stop at the AUS and not proceed with the underwriter. That if you have an underwrtier review and underwrite this, then this would be called a commitment to lend.
In my opinion, here is the major issue regarding the pre-approval with an AUS approval. What happens if the loan officer calculated income incorrectly? Or that they missed a large deposit on the bank statements? Or they missed child support on the pay stubs?
Summary : A very good qualified loan officer should be able to just hand out a pre-qualification letter and the loan should still close. Here is an excellent comment by Robert Rauf on Lenn Harley's post. - Rob's comment - This is just myself, but if I am unsure of a particular borrower and I run AUS and it comes back refer, I will then go over it with my underwriter. I don't need to go through the whole approval process.
Something else that just took place more recently and why Pre-Approval Letters might not be as credible, even if an underwriter signed off on the file. Under Fannie Mae, a new credit report has to be pulled prior to closings. You don't have to do this on FHA loans. But it has become a lender overlay with many lenders, to where they are doing this anyhow. Larry Bettag wrote about this - Don't use your credit after you apply for a loan.
There was some discussion about RESPA and the new GFE rules and what Fannie Mae has said about pre approvals. First thing is that you don't need a Good Faith Estimate to give out a pre-approval letter. You can give a borrower a form that is called an 'Itemized Fee Worksheet', which is exactly the same as the old GFE, Good Faith Estimates. There are 7 trigger points that have to be met to tell a loan officer that a GFE has to be sent out by RESPA's rules. You could still give out a GFE prior to this, but the lender is held to that GFE. That is the issue surrounding GFE's.
Keep in mind - There are many lenders with their own lender overlays, which is why you are reading so many different answers from loan officers. Some loan officers think their answers are from HUD, when it's actually from their company, just trying to be extra careful.
PS. - I received an approval from my underwriter to post on this topic - Monday dry Humor -
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