This is a great post that should help clarify some of the questions and misconceptions about the various degrees of loan "pre-approval".
Lenn Harley wrote a blog on Sunday in which she rightfully questioned the accuracy of what was being stated on another blog about Pre-Approval Letter. The writer of the blog that Lenn was questioning, stated that her Loan Officer had informed her that he would no longer be able to provide her with a Pre-Approval Letter for her Buyers because of restrictions imposed by RESPA. This information was incorrect, Pre-Approval Letters are very much alive and well. But before I go any further let me give three very quick definitions of what I consider a Pre-Qualification Letter, Pre-Approval Letter, and a Loan Commitment Letter. Keep in mind that these are MY definitions, and MY opinion.
- Pre-Qualification Letter: Loan Officer pulls credit, and inquires about income and maybe bank information. From that the Loan Officer makes a quick determination as to whether the Borrower could possibly qualify for a Loan up to a certain dollar amount.
- Pre-Approval Letter: Loan Officer pulls credit, inquires about income and bank information, takes a full Loan Application, may or may not collect some documentation like paystubs. Runs all this information through DU or LP along with a hypothetical Sales Price, and looks for an Approved/Eligible or Accept.
- Loan Commitment Letter: The Loan Officer does everything that he or she would do if there was a property, pulls credit, collects all necessary documents, Borrower signs a Loan Application along with disclosures, and everything is submitted into Underwriting. Everything that would be done for an actual Loan would be done except for an Appraisal, because there isn't a property yet. The Underwriter then issues a Loan Commitment Letter up to a certain dollar amount, based on a property being able to appraise later once a property is found.
Again these are MY definitions, other Loan Officers will have their own, including equating a Pre-Qualification Letter to a Pre-Approval Letter, because that is what they do for their Pre-Qualification Letters. You need to find out what your Loan Officer means when he or she uses those terms.
Having said all that, why would a Loan Officer make a statement like the one made in the blog mentioned above? The reason is that if a Loan Officer takes six pieces of information from a Borrower, RSPA requires him to then issue a Good Faith Estimate (GFE), because those six things constitute an Application in the eyes of RSPA, and they HAVE TO issue a GFE within 3 business days or be in violation. The six things are:
- Borrowers Name
- Social Security Number
- Property Address
- Estimate of Value of Property
- Loan Amount
So why would issuing a GFE present a problem? The problem is that with the new GFE that went into affect at the beginning of the year (which has its own problems, but that is another blog) the Lender is locked in to some of the figures (Lender Fees) for 10 days, and for some of the Fees they only have a 10% flexibility. Lenders are hesitant about being put in that position, especially since there is no property yet, and the Borrowers Credit Scores could change by the time a property is found, which might require Points to be charged.
If a Lender does not want to issue a Pre-Approval Letter, because they don't want to run the risk of having to issue a GFE and be locked into those fees, then they should be upfront and just say so, and not create a Myth that RESPA does not allow them to do so.
The other reason why a Loan Officer might say something like that is because they want to play with the Fees. Use a low figure to get a Borrower to go with him or her, and then tack on higher Fees and Points once the Borrower is ready to put a loan into process. Most of those games have gone away, but they do still exist.
If your Loan Officer will not give you a Pre-Approval or Pre-Qualification Letter for a Borrower, or if you are one of those who feel that a Pre-Approval Letter or Pre-Qualification Letter is worthless, then you need to find another Loan Officer, who will produce one that you can trust.
Most of my business comes from referrals from Realtors, so I am very careful about what I issue. When I issue a Pre-Approval Letter it is worth FAR MORE than the paper it is written on, and the only way that Borrower will not be approved for a loan, is because something that could not be foreseen at the time of application, later pops up.
Get your Buyers Pre-Approved by a trusted Loan Officer as early in the process as possible, and DO NOT accept the Myth that you cannot be given one!!!
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org