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What should "Pre-approved mean?

By
Real Estate Agent with Coldwell Banker Select Real Estate

 

In 1984 when I starting selling homes in rural Nevada we were taught to qualify a buyer in our office before we spent any of our valuable time showing them homes. We asked them fairly simple questions like; "How much do you make? "How much do you owe? And "How much do you have in the bank." We did this so that we would know what price range the homes should be in before we put them in our car to show them houses and if they were a able to afford a home.

I have always considered myself a REALTOR who embraced change and I have seen many great changes in our industry in the past 25 years. I was the first in our town to use a cell phone. I was one of the first to own a computer, an IBM PC junior. I brought back the first INFO box from our 1989 convention when I was incoming board president. Everyone laughed at me and said "No one will get out of the car to take a flyer out of that!"

One day it became popular to send a buyer directly to the lender who would loan them the money to purchase the home to be prequalified. Buyer would see how much their payments would be, how much home they could afford, what loan programs were available (such as FHA and VA) and frankly, they could see if they liked the person they were doing business with. Loan officers would tell them how much house they could afford to buy. Sellers were impressed when we brought along a note from the lender with an offer to purchase a home saying these buyers were prequalifed. We didn't have FICO scores back then. Once this process became popular we did not hear the term "It fell out of escrow" quite so often. Our average escrow was 60 days long.

The language of real estate changes constantly and a good agent must keep up with the changes. At some point a prequalifed buyer was looked at as the buyer a busy mortgage broker asked qualifying questions but did not actually pull their credit report. The standard was "If everything the buyer says is true, they can afford this home." Prequalification actually meant preliminary review.

A few years back we went from prequalified to preapproved. The standard then was prequalifed meant that the lender has interviewed the buyers and reviewed their application and pulled the credit report. A stronger preapproval letter meant these buyers have completed the process. The loan officer has reviewed and verified the information and sent the loan package on to underwriting. The preapproval would state that the buyers qualified to purchase a home in a certain amount and the loan would be subject to the home they selected for their purchase to qualify as well,. The lender needed only to be assured that the property value was sufficient for the lender to take the risk. This now became the standard of the industry. However, as near as I can see... this standard is not in writing anywhere.

Today I received a purchase contract owith a preapproval letter attached and stating that based on the mortgage company's initial analysis and credit rating the buyer was preapproved to purchase a home in the amount of $599,000. My assumption was that because this was a preapproval and not a prequalification the loan officer had sent it on to an underwriter. I was wrong. The lender informed me that "prequalifed/preapproved is the same thing, The loan isn't approved until it is approved". Has the standard for our industry once again has changed? It is now necessary to ask more questions? Where I believed that the ‘pre' in preapproval meant ‘before home selection' it really means before the loan officer has completed their job.

As our industry changes and agents strive to present the strongest offer possible to have a competitive edge over another buyers offer or to show the seller they have a good solid offer in front of them we need to constantly demand stronger letters with stronger language from loan officers to include with the purchase offer. Many sellers, especially with new construction will make substantial financial commitments into the property as soon as escrow opens to be assured the home is ready for a certificate of occupancy in time to close escrow. We as listing agents owe the sellers the assurance that the buyer is truly able to qualify for the loan before the seller increases his investment in the property. For the listing agent to do a good job for his seller the buyers agent needs to insist the buyers loan officer get a real commitment from the underwriter. The pre in preapproval should only mean before the home is selected. This way the buyers offer is stronger, the seller is at less risk (and thus less nervous )and both Realtors appear as true professionals doing the best job possible for their clients.

Renee Gerke
Peoples Mortgage Company - Chandler, AZ
GML,GRL,CRMS

It is indeed frustrating to have mortgage officers operating under a differnet set of "assumptions". Until there is more regulation of the lending industry this will continue to be a problem.  As the listing agent this makes your job frustrating to say the least.

In the future I would suggest before submitting the offer to your buyer, call the lender and ask if this has been through automated or destop underwriting and did it receive an "approved" finding.  It is not approved if it received an "ineligible or refer". 

I'm proud to be a loan officer that has certifications from the NAMB and NAPMW and strongly support more regulation of our industry to weed out the incompetent that make us look bad.  Any professional mortgage person with integrity would welcome an inquiry from an agent and be happy to provide information.

 

Feb 05, 2008 01:24 AM