As I am the master of the obvious let's start by clarifying the obvious;
I am a lender, have been one for over 30 years, my perspective and viewpoints are those of a lender.
now the answer to the question, the real problems with preapprovals are...
too numerous to mention
but I'll try anyway. Let's start with what it is or may be, once again from a lenders perspective.
pre; meaning before...therefore a prapproval is before an approval.
it does not guarantee anything.
problem: a preapproval letter is not clearly defined in that there is no (national) standard as to what it must contain, how it must be written, or how long it is good for.
does anyone have the fannie, freddie, VA, FHA, USDA regs for preapprovals? can I have a chapter and subsection please.
I would like to put 10 Realtors in 10 different rooms and ask them all to please define what a preppproval is, and what they feel they are receiving when they get one.
Do you think I might get many different and diverse answers.
Now, before I get some nasty comments from my Realtor friends out there. I have seen some preapproval letters that look like the only thing that's missing is that they weren't written in crayon.
On another front, moving right along. Think about this...
Even when a lender gets "good" documentation for a preapproval, that documentation is dated, meaning that it has a shelf live. When a lender needs to update documentation, things change sometimes, and the preapproval may vanish into thin air. Take for instance
a new credit report may be needed after 90 days, so tell the buyer to get it in gear and make some decisions. But, you know I actually know of one or two investors who want new credit after 60 days, and then, sometimes, there's that nasty quality control pull, at the end of the process.
Now we all know no matter how many times we tell the buyers "Don't Buy Anything." or don't take any new cards, or don't anything, that they, well you know. But also, sometimes derrogatory items that did not show up on the original report now appear, as if out of the clear blue sky.
Let's try this on for size.
when doing a preapproval the buyer in most cases does not have a property under contract, and yet when doing the PITI the lender must consider a cost for both taxes and insurance, a "Good Faith Guesstimate" so to speak. I'm in Southwest Florida and the margin for error here is substantial. Flood Insurance? no flood insurance? homestead? no homestead? age of the home (that's a real biggie here). So the estimated PITI can vary when the property is selected.
Before I get a whole bunch of
let me see if I can make some sense of this (remember my perspective now).
First, find a lender, Loan Originator, you can trust. If you can't fufill this requirement, than you're dead in the water from day 1.
Second, if you're in Southwest Florida, they need to be a local lender. I don't care what any of the national guys/gals are saying. Our guidelines and marketplace are in a constant state of change and if you're not standing in the middle of it you can't keep up. If you are standing in the middle of it, it's still a challenge.
Consider your preapproval letter like a good faith estimate.
In "good faith" I am attempting to give some guidance as to the buyers ability to acquire a mortgage, what type of mortgage, and what the maximum mortgage amount will be. I take this task very seriously. If I issue a preapproval that means I want to work with you, and your buyer, and will do evrything I can, legitimately, to bring the transaction to a successful conclusion, in a timely fashion, with as little aggravation as possible.
Good Communication amongst all parties is essential to accomplishing this goal.
psst; a little secret here; I too, am on commission, and only get paid for closed transactions.
We need to work as a team, the Buyer, the Realtor, and the Mortgage Lender.
In our current world of extensive/complete documentation, a preapproval letter is a challenge, and I have an answer to the question, that I believe to be truthful, but probably not popular.
the real problems with preapproval letters are