Could The Pre-Approval Letter be Pointless?

By
Mortgage and Lending NMLS#914312
You may have heard the term “pre-approval” or “pre-qualification letter” and how vital they are to the home buying process.
 
A pre-approval, sometimes referred to as pre-qualification or a preliminary loan approval, is one of the first steps that lenders perform to find out how much home the buyer can really afford.
 
The lender will take the loan application, order a credit report, and will tell the borrower whether or not they are approved or qualified for the loan.Could the Pre-Approval Letter Be Pointless?
 
There’s a little disclaimer when it comes to pre-approval letters.
 
Most often they will say “loan subject to verification of certain items.” Lenders may be able to get a great snapshot of a borrower’s credit history, report, income, and liabilities but if things change, certain documents are neglected or other financial issues come up, the loan approval could be useless.
 
There’s another term called “loan commitment”.
 
While many pre-approvals result in loan commitments it is not uncommon for a borrower to first receive a pre-approval letter only to find out that the pre-approval was subject to conditions that the borrower could not meet.
 
This prohibits them from receiving the loan and denies the opportunity to buy the property. See More: Loan Documents Needed for a Home Loan - http://mylenderjackie.com/documents...
 
Pre-approvals themselves are a good thing and definitely should be the first step in obtaining a mortgage loan, however, if anything financially changes between the time the pre-approval was issued and the loan closing, it could risk the borrower losing the property.
 
For instance, I recently had borrowers that were well approved for a home loan.
The debt to income ratio was appropriate, credit history was good and credit score was adequate. I issued a pre-approval letter insomuch as things financially don’t change drastically between the time the letter was issued and closing.
 
However, the borrower neglected to pay a couple of credit card bills causing delinquent red flags on their credit history and applied for a car loan worth $20,000.
 
Because they were approved for the car loan, it increased their debt to income ratio and because of the default on the credit cards, their credit score dropped.
 
By the time the property was set to close and the final loan documents were collected, I could no longer offer this borrower the same interest rate.
 
The borrower also was required to come up with a higher down payment.
 
Luckily, we were able to save the transaction but because of the borrower’s radical change in financial status, it could have lost them the home altogether.
 
A loan commitment is a letter provided by the lender that will indicate that the borrower has passed all underwriting guidelines and are approved for the home loan.
 
This final loan commitment typically doesn’t happen before an offer is in place.
 
The pre-approval letter will help the borrower determine how much home they can afford, which will help them find the right property.
 
But once an offer is placed, the loan commitment takes over and as long as nothing changes financially, the pre-approval process should result in a final loan commitment.
 
For more information feel free to contact me at any time. I’d be happy to answer any questions you might have a pre-approval letters or loan commitment letters.

Comments (4)

Kristin Johnston - REALTOR®
RE/MAX Realty Center 262-567-2455 - Waukesha, WI
Giving Back With Each Home Sold!

I agree...I just wish the loan commitment could be firmed up earlier in the transaction instead of 30 to 45 days out typically

Oct 04, 2016 12:02 AM
Patricia Kennedy
RLAH Real Estate - Washington, DC
Home in the Capital

The actual honest to gosh loan commitment is actually not issued until the time the closing documents go to the title company.   Even the letters from the lender that we use to remove financing contingencies have some pretty iffy language!

Oct 04, 2016 12:11 AM
Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Jackie and such a well written blog you are sharing here in the rain.  I have a new buyer that was just telling me last night she can not believe it takes that long for a loan approval when she got a letter right away.

 

Oct 04, 2016 12:27 AM
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Jackie, some of our listing agents will call the lenders versus needing that approval letter.

Oct 04, 2016 01:44 AM
Jackie Barikhan
Always a good idea to call the lender to get a feel for the borrower and the lenders time line!
Oct 04, 2016 03:00 AM