Do pre-approval letters mean Proved? When they do, everyone wins!

Accepting ‘pre-approval letters’ that aren’t worth the paper they are printed on -OUCH

Someone recently commented to me that some 19% of all real estate transactions are falling apart during the approval process never to get to the closing table. Ouch!
The failure stems in part, from “ the acceptance of ‘pre-approval letters’ that aren’t worth the paper they are printed on”, according to a Realtor friend of mine . Sellers, Buyers, Realtors and others are simply rolling the dice when they make or accept an offer on a property without first insuring that the borrower is pre-approved. Yet I wish I had a dollar for every time I hear that I am the only one who insists that Pre-approved means proved!

And that takes time, teamwork, and serious expertise. The process of approving a loan these days is so complex that it has a lot of people in the industry questioning their choice of career. In the past, we made approval decisions based on RISK. If it made sense there was a way to get it done. That is no longer the case. While that is one component of today’s underwriting standard, it is exponentially more complex of a process today than even a year ago. We need your help! We have to prepare people for the new normal and that means everyone needs to understand the process and work together.

Every single aspect of our business is under a Nuclear Microscope of scrutiny. I keep telling people that we don’t just dot I’ s and cross T’ s anymore. We have to cross I’ s and dot the T’ s too!

• We approve payment not price. Perhaps one of the most important and overlooked things is that we approve for a maximum payment amount, not a purchase price. While we can approximate a value range for you, it will be with an approximate amount for property taxes. They are the wild card in most pre-approvals today since they are all over the map depending on the assessor’s view of value. If rates start to fluctuate, that can also influence how much someone will be approved for so what is true at 4% won’t necessarily be true at 4.5%. If it’s going to be tight, get that rate locked in.
• All cash has to come from an ‘acceptable’ source. Generally, that means it can’t be borrowed from an unsecured source or a gift from a friend. Each type of loan has a different set of rules. We can’t use mattress money and we have to track any money we do use back to the source. Any deposits on a bank statement that are not clearly labeled payroll deposits must be explained and thoroughly documented (yes, we need a paper trail). It doesn’t matter if it was $100 you got from selling something on E-Bay, we have to prove it.
• We need official bank statements, not computer generated transaction reports from a bank. All pages. With the advent of IPADS and Internet banking, it is common to get what the borrower thinks is a bank statement. However, we have to have the official ones so don’t throw away the paper! If your e-statement doesn’t look just like the paper statement, we can’t use it.
• All income must be stable (have a 2 year history of continuity) and expected to continue for 3 years. Income is proved with 30 days of official paystubs, and tax returns for 2 years with all schedules and W-2’s. Anything out of the ordinary requires further documentation and that often requires additional time to obtain. Sounds easy right? Some people tell us they work full-time but give us paystubs that reflect anything but a 40 hour or consistent work week. Or, a weird deduction shows up on their paycheck and we have to find out what it is.
• We get Federal tax returns upfront to check for business expenses and other things that change the underwriting outcome. Some lenders wait until the appraisal comes in and the loan gets submitted to underwriting to check IRS transcripts and then, whoops! A line shows up that derails the deal. A little prevention is worth a pound of cure, as they say.
• We have to get our own credit report and verify both current debt and that there is no additional debt that is unaccounted for. That means that inquiries have to be documented. Occasionally, we have to correct deficiencies and that can take 5-10 days. If someone is disputing an account and it shows up we have to stop and get the disputed item removed. Disputed items impact the credit score by artificially increasing it while the item is in dispute.
• We have to recheck everything 24-72 hours before closing. We have not one but two disclosures that cover this and yet, when we go to pull the credit refresh report just before closing, we find that borrowers have gone out and purchased furniture and appliances that they thought we wouldn’t find out about. We will and it will stop a closing in its tracks. We also have to re-verify with their employer, via a phone call, that they still work there. We see these folks once. You see them a lot more and talk to them while you’re showing them houses. Help us reinforce the importance of Not changing the Picture!
• Give us time to do it right. It takes about 4 hours to set up and underwrite a file once we have all necessary documentation. Stress the importance of the pre-approval process before you agree to show the borrower houses.

The next time you accept a pre-approval letter from a lender ask them if Pre-approval means Proved! When you do, everyone wins!