DO NOT ACCEPT PRE APPROVAL LETTERS

the SIMPLE words I request/demand every lender includes in pre-approval letters given to me: "borrowers name" had their credit score ran on ( inserted date) and their employment, income & assets have been verified and they are qualified to purchase a home in the amount of ( inserted amount) with $xxx down payment.

  This is not the commitment, as some lenders try to say. this is simply a borrower providing their info and a good lender verifying it. The appraisal could still ruin it, but I just reduced the odds of a problem dramatically.

i agree most have little value and no substance. 

maybe the article should state don't ask for a preapproval letter.

 

Pre approval letters have been okay for such a long time because it seemed as if "everyone" could get approved for mortgage, they just needed a pulse.  Now with times a changin' even with an DU/LP approval, thinigs can be "caught" even when it gets to closing dept to send docs out.  Underwriters make mistakes and sometimes these things are caught later on (this is rare, but does happen.)  The loan is closed and the transaction is final when everyone has their checks and the borrowers have their keys, until then...

 Don't get me wrong, an experienced LO should be able to give solid pre approvals with DU and LP but there are many unknown factors, such as the appraisal...that sometimes NO ONE can foresee.

Daniel Eckenrode- Free State Mortgage, LLC

Good post. There are so many unscrupolous lenders lurking out there. Heck they may say the same about us. But we must ask the right questions in order to get the right information. I stay very close to my clients and i've worked with a few lenders that i've known for yrs. I tell them(Buyers) to always get a copy of a Buyer's Estimate sheet so we can go over numbers or if they want to compare one company to the next.

Scott - there's only one problem: No Contract NO APPRAISAL. No APPRAISAL  - no APPROVAL. My pre-qualification letters are as good as an approved BORROWER. Once they find the property and the PROPERTY passes then we issue a clear to close. Now we're a LENDER so you're cutting most BROKERS right out of operation. I understand your competition may have beaten you with a pre-approval but that happens. I'm not going to waste an underwriter's time until they have a real deal to work on. The few that are left are very busy trying to close FULL PACKAGES. And, if as a broker, you submit incomplete packages to underwriting just a couple of times you'll find your files going to the back of the stack.

So instead of telling agents never to accept a pre-qualification letter you need to be shouting at the brokers to make sure they issue only SOLID pre-qualifications like my team has done thousands of times successfully.

I know there are lazy, greedy loan officers who just fire off a pre-qual but that's not the truth in every case. We pull credit, ask for docs and verify before we offer a pre-qualification letter.

Do people even do pre-approval letters anymore?  Every letter i send out is an automated approval letter.  Some have conditions, some don't.  I have no problem with a listing agent calling me and asking me about the approval and often they request I make adjustments to it.  Fine.  But to demand a final approval from the underwriter prior to submission won't work.  What happens if the contract isn't accepted?  I'll tell you, often you have to generate a new file that may have an impact on the loan lock.  I think the answer is to get a letter with specifics - approved through automated underwriting with income and assets reviewed, credit was run and is sufficient, and any final stipulations required prior to closing (appraisal & title).  Maybe put in a quick financing deadline and stick to it?  A loan can be originated, underwritten and approved in day(s) today.  The days of a pre-approval letter are gone, just take the time to communicate...we all want the loan to close.  

This is a great post. I know the pre-approval was not the greatest, but it was something. Thanks for enlightening me to this other option.

Scott,

That was a very well written post.  There is an obvious disconnect in terms of communication between most real estate agents and mortgage originators.  I've always laughed when asked by a real estate agent for a pre-approval, which is because pre-approval is just a feel good letter.

A real approval involves so much more, but often agents will shop their buyer to several of their mortgage brokers, and they are in such a hurry to get the thumbs up that they often do not allow the mortgage lender to do a proper job in terms of qualifying the buyer.

So for those new real estate agents, don't assume your buyer will qualify.  If they claim their cousin or friend approved them already (don't believe them), make sure they bring all their paperwork to your favorite mortgage partner, and tell your buyer that you'll get back to them in a couple days.  

 

Hi Scott,

Welcome to the Rain and congrats on your first Featured Post!  How awesome is that?!  These are some excellent points and it leaves us to shake in our boots.  These are some very scarey times we're entering in the real estate business.  I have always tried to get the loan officer on the phone when it's our listing but have actually been told by loan officers that they won't talk to us as the listing agent, if it isn't our buyer.  The other thing is that those conditions are usually there until the day of the closing in some cases.  Also the appraisal isn't usually done until the week or so before closing.  So where does that leave the Sellers?  Well, in my opinion, it's been a shakey process all along but the preditory lendors have made it alot easier and now that is no longer the case.  So back to business as usual!  Thanks for an enlightening post!

Great post. This is the reason working with a Bank not a Broker is suck a key in our market. Banks always seem to take the time to actually approve the client, not just give it a once-over. And their reputation has more at stake!

There seems to be some disagreement among the various mortgage professionals above as to how much weight a letter carries, at what stage approval can be obtained, and how much information can be safely given out.  No wonder there is confusion as to what a pre-qual or pre-approval letter means or what we as agents should do with it!  I personally put little faith in them, and advise my seller clients as such.

That said, it is obvious that in life there are no guarantees.  Some reputable and honest lenders probably issue letters fully believing a loan will fund, but some unforeseen glitch leads to a collapse, while others are just flat out lazy and dishonest and are just hopingit will fund by some miracle.  Either way, any "pre" approval is as speculative as the pre-approved credit card offers I get every day.  Any loan has the potential to crash and burn up to the very last minute.  Even with constant communication with lender and buyer's agent, I've had financing unexpectedly fall through within days, or hours, of closing.

But, this doesn't alleviate our obligation as agents to at least make what reasonable efforts we can to follow up on these details and at least ask the right questions to try to catch any glaring inconsistencies in the buyer's ability to close.  Getting it wrong, and not even trying, are two different species of bad.

With titles, surveys, disclosures, inspections, financing, repairs, termites, lead-based paint, mold, appraisals, ordinances, CCR's, and the countless other issues which can arise in a transaction, our duty is to act in good faith in addressing and following up on each of these issues, NOT in controlling them.  We don't have that power.  We can view pre-approval letters with a jaundiced eye all we want, but absent some better means of pre-determining a buyer's contractual strength, all we can do is follow up to what limited extent is possible.  Lenders are likewise constrained by the completeness and validity of information given to them when providing pre-approvals, and do not exhibit complete control over outcomes.

However, I think more open dialogue such as this between agents and lenders will certainly pave the way to better results for all, as will enforcement of ethics on all sides!

Scott....  I don't want toi be a bah humbug here...  What I think people need to know is the difference between a pre-qual letter and a pre-approval letter. In realty, the pre-approval letter should be the commitment letter. The letter you ga example to is a pre-qual letter. And I think we have many confused people in this forum. Even some loan officers.

On another note... it sounds like some loan officers in here just do conventional, because all they talk about is DU and the approval. If you do FHA, most loans run through the system will be referred and manually underwritten. It also sounds like we have a lot of brokers in here. At my company, we underwrite in-house.

Overall, I am going to agree with Ken Cooks comment the most. I think you are giving certain people in here false hope on what to accept and not to accept. My pre-qual letters are just as good. Why?  Because I know what I am doing. And for you to tell people what to accept and not to accept, in my opinion, is giving misleading information. You are talking about the unscrupulous loan officer that will fire off any type of piece of paper.

Which means that if I wanted to, I could print out a commitment letter with a bunch of conditions and it still might not mean much. So, for arguments sake, couldn't we say, don't accept commitment letters also????  Just my .02, but I could find an argument for all of the above.

PS.....  Scott... I also agree with Dennis Serra's statement. The borrower has privacy rights. In realty, there isn't too much that you can tell anyone else. That is a fine line that is not mentioned and some comments in here say otherwise.

Jeff, correct me if I'm wrong its been about two years since I did FHA but can't you manually submit prior to acceptance of a contract or appraisal to the lender?  I did this all the time when I did FHA.  This way at least you know they have gotten conditional approval based on XYZ stips from the underwriter.  I am curious as I will be doing FHA again shortly, Chase was my goto for the manual underwrites as they were easier to deal with at the time. 

In addition most of the nonconforming lenders that are left have automated underwriting engines online and if they don't then the loan officer/broker is dealing with a passthrough and should due the due diligence to find out who they are selling to as that lender will always have the better rates.

I have a story.  I went into escrow representing the buyer on a manufactured home.  The buyer had been approved for a loan, although struggled to get approved.  The selling agent put on the listing that this home was on a permenant foundation (it is only 2 years old).  It was not.  The buyer really liked the property, and long story short 4 months later work was done, permits pulled, and finally HUD's 433 was filed with the county.  However, in this 4 months, the lender supposedly changed their criteria for manufactured homes, and the buyer no longer qualified. 

You did good on this one.

I always run my borrowers through some type on automated underwriting and give my realtors a copy of th e findings.  Once I have done this, everyone knows what is needed to get the deal closed on time.

Wishing You HAPPY HOLIDAYS and Best Wishes for A GREAT YEAR 2008.

Tommy   New York Certified Home Inspector Long Island NY Nassau/Suffolk/Queens Home Inspections

seems like once again good communication is key in our shades of grey world

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