You visited your local bank, got your pre-approval and are ready to go shopping for a home. Not so fast! That pre-approval may be worthless.
During the past few years we have seen more financing fall through, AFTER a contract is in place, than ever before. It's frustrating, not to mention embarrasing, for both the buyer and agent.
All Pre-Approvals Are NOT Created Equal!
Although all pre-approvals are NOT equal, your loan is actually processed and underwritten through the SAME national, automated underwriting systems. Fannie Mae’s DU/DO (Desktop Underwriter/Desktop Originator), and Freddie Mac’s LP (Loan Prospector), are utilized by the entire industry to automate the loan approval process. FHA and VA also utilize Fannie Mae's DU/DO to underwrite their loans.
It doesn’t matter if your loan is processed by Main Street Savings & Loans or ABC Mortgage Corp. They all utilize the same automated system. However, the most important and critical issue is WHO is reviewing and processing your loan BEFORE it is entered into the automated system?
The knowledge and experience of that individual is key to the success of your loan approval, especially since lending rules and guidelines are constantly changing in this volatile real estate market.
Does Your Bank Really Know What It's Doing?
Why are large bank pre-approvals so frowned upon by sellers and their agents? Well, it has to do with the chain of command. The loan officer (LO) at your local bank is usually just a happy face whose job is to accept your loan application and hand it off to the processing and underwriting department.
The LO has minimal understanding of your DTI (debt-to-income ratio), your credit, and your employment, and therefore cannot thoroughly review your application before submitting it. They know so little about the actual loan approval process because it is not their job to know. The bank wants it that way.
Your Loan Officer Should Be the EXPERT You Need!
On the other hand, the loan officer at most mortgage firms has been taught to review, advise, and process the information and documentation you have provided them BEFORE it is entered into and run through the automated approval system. The firm’s LO should be your direct connection to your loan approval. Your LO should be the expert on all things related to your financing.
Not to mention, the LO at a mortgage firm has hundreds of lenders, INCLUDING your large local bank, that they can place your loan with. If one lender doesn’t work out, another will.
Fannie Mae Didn't Deny Your Loan...YOUR BANK DID!
Keep in mind, the large banks have what we call “overlays” to the automated underwriting system. Just because Fannie Mae, Freddie Mac, and FHA allow it doesn’t mean your bank will want to deal with it. You are limited to the bank’s confining guidelines without ever knowing it. You may be told that Fannie Mae or FHA denied your loan, when in fact it was the bank itself.
Ready to go shopping for a home? It's important to get it right from the start.
Watch for the upcoming Secret #2 of Buying a Home in my next post.