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What you have is a PRE-QUAL letter; Please please please... I need a PRE-APPROVAL letter

Real Estate Agent with Roy Wheeler Realty Co.

February 26, 2011 01:43 PM

Will someone please tell me why I have such trouble getting a PRE-APPROVAL LETTER? Recently, I've had buyers agreeing to get a pre-approval letter, and once they spoke with the lender, they were going to wait until they got closer to actually writing a contract. EXCUSE ME? If I tell you I need a pre-approval letter, I need a pre-approval letter. For one thing, I don't want to waste your time or mine looking at houses you may not be able to buy. Until that credit report is run, we won't know what kind of rate you're getting and how much money you will need for your downpayment.

I wrote an offer today with the world's greatest buyer. I was still irritated when his "pre-approval" letter said, yes, we can do what you want us to do, but it's all contingent on your giving us this, that, and the other thing. That is not a pre-approval letter. That's a p-r-e---Q U A L I F I C A T I O N letter. It's not the same thing. It's contingent. And it can make the difference in whether or not we get the seller's attention and his agreement to sell his house for the amount of money you've told him you're willing to pay.

Why are lenders not giving pre-approval when they are asked for? Or is it really the buyer? What is up with this? Pre-Approval means the buyer is Approved. Period. Hrumph.

PRE-APPROVAL GIVES YOU CONFIDENCE

How much you can borrow : amount decreases as interest rates rise
Looking at “Right” homes: price, size, amenities, location
Find the best loan: rate, term, type
Uncover issues early: time to cure possible problems
Bargaining & Negotiation power: price, terms, & timing
Close quicker: verifications have been received

Items Needed for Pre-Approval

Photo ID
Two months current pay stubs
Last two year’s W2s
Complete copies of checking and savings statements for last three months
Copies of statements for IRAs, 401k, savings, CDs, money market funds, etc.
Employment history for last two years with addresses and contacts
Proof of commissioned or bonus income
Residency history for last two years with addresses and contacts
Assets for down payment, closing costs, and reserves; must provide paper trail
If self-employed, last two years tax returns, current profit and loss statement and balance sheet; copy of partnership/corporate tax returns for last two years if owning more than 25% of company
FHA requires driver’s license and social security card
VA requires original certificate of eligibility and DD214
Other things may be required such as previous bankruptcy, divorce decree

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Raiza Schwartz

West USA Realty - Ahwatukee, AZ

CDPE

You know what fustrates me, is when clients get upset if a lender-owned property or investor owned property requests a secodnary approval letter from their preferred lender.

I had to explain to my clients multiple times that this approval letter didn't mean they had to go with the investor, it just gave them extra verification.

Needless to say, the listing agent was willing to talk to the lender I referred my clients to, and had no problem with my lenders DU sheet.

Feb 26, 2011 01:47 PM

Billi Evans

Murney Associates - Springfield, MO

Direct and to the point. Thank you for an easy to understand explanation that I can share wiyh my clients.

Feb 26, 2011 01:48 PM

Rodney Mason, VP of Mtg Lending

Guaranteed Rate NMLS# 2611 - Atlanta, GA

AL,AR,AZ,CA,CO,FL,GA,IN,MI,MS,NC,NV,SC,TN,TX,VA,WA

This topic comes up on here from time to time. In today's market, you will most likely not be getting a Pre-Approval letter. Much of is this is due in part to RESPA laws that went into effect January 1, 2010. They concern changes in fees that are initially disclosed to the borrower.

The FDIC website has a very specific definition of Pre-Approval. The FDIC states that the Pre-Approval cannot be subject to certain other additional conditions. Basically, nothing other than sales contract, property address, appraisal, insurance, title, and no material change in borrowers qualifications can apply.

Essentially, this means that the file be be fully reviewed and approved by an Underwriter, not a Loan Officer, prior toa Pre-Approval being issued. If you have a Loan Officer issuing the Pre-Approval simply based off of an automated underwriting approval, then they are not following the FDIC definition of what constitutes a valid Pre-Approval. Since the FDIC regulates all banks, everyone should be following this definition for them to remain in compliance.

As for interest rates, a borrower cannot lock in their interest rate until they have a property under contract and a closing date has been sent. Until that point, their interest rate is floating with the market fluctuations. This is one of the many things that have changed in the lending world in the last few years.

A loan office who knows the underwriting guidelines and what they are doing can issue a Pre-Qualification letter that is as good as a Pre-Approval letter.

Feb 26, 2011 01:55 PM

Fred Griffin Florida Real Estate

Fred Griffin Real Estate - Tallahassee, FL

Licensed Florida Real Estate Broker

Virginia, thanks for an excellent post about a most imperative topic.

And a tip of the hat to Rodney Mason for adding the FDIC Link to your original comments.

Thank you both!

Feb 26, 2011 02:11 PM

Fred Cope

Reliant Realty in Nashville, TN - Nashville, TN

Looking For Homes With A Smile

Virginia,

Rodney makes some good points, and I concur with much of what he says. While I do not think a pre-qual letter is as good as a pre-approval letter, I do think it is a bit unreasonable to insist that a pre-approval letter (without conditions )must accompany the written offer. We all want things to be as "sure" as we can, but life doesn't come with guarantees--so why should anyone expect a "sure" deal on real estate.

A good, reputable loan officer has nothing to gain offering bogus letters. Evidence of underwriting approval (with basic and reasonable conditions) should be acceptable. Any "Commitment Letter" is going to have such clauses as "subject to acceptable appraisal, and no adverse change in the borrowers income, employment, credit and assets." Over twenty-five years in mortgage finance, and seldom did I have a commitment letter with no conditions. The few I did, were on properties where an appraisal was already in place. In that 25+ years, the one thing I can guarantee is that there are no guarantees.

This is where a listing agent proves his/her worth: asking the right questions of the buyer's agent, giving valuable information to the seller, and PAYING ATTENTION TO EVERY DETAIL.

The problem is, WE HAVE ANOTHER EXAMPLE OF HOW OUR GOVERNMENT [the one that gave us AMTRAC, the IRS and the US Postal Service]. Welcome to the Nanny State.

Feb 26, 2011 03:02 PM

Jeff W

USDA / FHA Mortgage Source - Jacksonville, FL

USDA /FHA Mortgage Source

Great points made by the loan officers above. RESPA changes aside, you really won’t ever get a full pre-approval without a acceptable appraisal. Of course this generally will not happen until after you have a fully executed contract. It all has to happen in a certain order and the appraisal is a huge part of it. So many things have changed in the mortgage world, especially over the last 18 months.

Feb 26, 2011 04:04 PM

Lenn Harley

Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA

Real Estate Broker - Virginia & Maryland

A pre-approval is far to much to expect today, IMO. A credit review letter is sufficient for me and we also provide the seller with a buyer's financial sheet. They can run their own numbers and know that our buyers are more than qualified.

Most "pre-approval" letters are no more that pre-quals anyway. What I want is a letter that states that the lender

has reviewed the credit report
has verified the income to qualify
has verified that the borrower has money to close.

That's about all we can expect. In fact, a full LOAN COMMITMENT can be withdrawn after a lot of work on the part of the borrower.

Feb 26, 2011 11:14 PM

Virginia Gardner

Roy Wheeler Realty Co. - Charlottesville, VA

Realtor, Charlottesville, Serving Central Virginia

First, let me think everyone who's taken the time to answer me; it's really been bugging me, lol.

Raiza, we're in the tranches, we understand what's happened and are doing the best we can to work with what we have. The general public hears about all of the bad stuff, but they don't honestly understand, and they certainly are shocked when they realize it impacts them as well. This is America! lol Sorry, that was a bit much, but cooome on, people... that investor seller doesn't know you. sigh Good point, Raiza.

Hi, Billi, thanks... I'm interested in what I'm reading in the following comments, more fodder for consideration.

Hi, Fred (Griffin), thanks for stopping by; I'm anxious to sit down and digest some of the info from Rodney and (the other) Fred, :-). Also, Lenn, who may have provided a great solution (as usual).

USDA Mortgage Source (sorry, I can't find a name at your profile!), I do understand the need for an appraisal, and I still make the sale contingent on financing for that and other potential ooppsses, but I'm looking for something with more teeth than the standard pre-qual, because, honestly, it's not worth mush more than the paper on which it is written.

Feb 27, 2011 12:42 AM

Virginia Gardner

Roy Wheeler Realty Co. - Charlottesville, VA

Realtor, Charlottesville, Serving Central Virginia

Hi Rodney, thanks for the link to FDIC and their definition of “pre-approval”. Actually, that’s exactly what I want; I want it to go to underwriting. I want my buyer to make the commitment to buying a house and get pre-approved.

Kevin, that’s what I want… and you’re telling I can get it. I understand that the letter cannot be completely condition-free… it will have to be subject to the selected property, the appraisal, and any changes to the borrowers credit or financial condition. That I understand. I like your reference to “a good, reputable loan office”, and I agree, absolutely and unequivocally. I wish I could still be living in that land of Pollyanna, that I lived in for so so long, because I always, without question, trusted the lenders with whom I worked to give me the straight skinny. I hate like anything that I have to be so darn careful with that now. I think those people are out of business now, but the scars are there, you know? That’s why I don’t trust pre-qualification letters anymore. But you’re telling me I CAN expect a pre-approval letter, as long as I understand there are conditions. Understood. Now I need to do a little beating up on people. (A caveat here… do I believe that USAA is going to give me the straight story about someone relocating with BRAC, absolutely; do I believe that lenders with whom I have a personal relationship (not schmoozy-type, I’m not much of a schmoozy-type, lol) will be careful and dot their t’s, without a doubt.)

Lenn, second-best, but really good. To me, this solution falls somewhere in between and certainly meets most of what is necessary, imo too, for sellers. When they are my buyers, I really would like to see the full shebang. I may be unrealistic, we’ll see. Thanks for the suggestion.

Feb 27, 2011 01:32 AM

Craig Snead

Quality Home Investments, LLC / Dearborn Heights, MI - Dearborn Heights, MI

Real Estate Investor

Virginia, all you are asking for is assurance that your time spent is with a qualified buyer. Not too much to ask. With the rules constantly changing, it may not be as easy as you hoped for. And people wonder why buyers seem so confused...

Feb 27, 2011 02:07 AM

Rodney Mason, VP of Mtg Lending

Guaranteed Rate NMLS# 2611 - Atlanta, GA

AL,AR,AZ,CA,CO,FL,GA,IN,MI,MS,NC,NV,SC,TN,TX,VA,WA

Most lenders quit issuing Pre-Approvals is for a variety of reasons. One main one is compliance with Federal laws. As I stated before, RESPA laws changed Jan 1, 2010 that governs the GFE. When that change took effect, a GFE now becomes more of a binding contract that it ever was. This has the potential to be a risk to the lender when a property has not yet been specified. The new GFE only allows tolerances for certain items to change. Not having the real specifics at the time of loan applicaton has the potential for a regualtory issue.

Another reason is simple economics. Mortgage companies simply do not have the staffing to complete Pre-Approvals where there is the strong potential that the buyer never actually buys. With loans being reviewed much more closely, the profit margins have been greatly impacted with the additonal hours now involved with a loan approval. That, along with the losses from foreclosures, makes for a difficult staffing situation sometimes.

I would not expect any more than a Pre-Qualifcation letter. I am sure that some are still issuing Pre-Approval letters that are really nothing more than Pre-Qualifcaitons.

Feb 27, 2011 06:04 AM