Mortgage Myth Busters: Knowing the difference between a pre-qualification letter & a pre-approval letter

Knowing the difference between a pre-qualification letter & a pre-approval letter

 

Pre qualification letters vs pre approval letters

 

Getting pre-approved over being pre-qualified, what does it all mean.

I have been doing mortgages for 18 + years and I have a very strong opinion on the difference between pre-qualification letters and pre-approval letters.

What do we keep hearing on the streets?  Pre-qualification letters aren't worth the paper they are written on. So, pre-approvals are written on gold bars then? The comments below is the reason why I wanted to give more insight to this argument.

 

 

 

Comments from realtors in past discussions :

"A pre qualification is of absolutely no use in my market. If it is not a pre-approval letter...you have NOTHING!"

"The loads of 'preapproval' letters flying around that aren't worth didley really irk me. A good loan officer doesn't run around flying around pre-approvals unless they've done the work."

 

Is there any real true definition that the mortgage bankers association or National Association of Realtors adheres to?  No, not really. It's all based on different definitions by different professionals. So I wanted to break it down using my knowledge and common sense. Keeping in mind that I have discussed this topic with a dozen or so mortgage loan originators who are very knowledgeable, who understand this business, and a few who have underwriting experience.  For the most part, they agree with my stance.

 

 

Pre-Qualification Letters

A loan officer will usually just ask a borrower the basic information. Such as :

  • Social Security number to verify/check credit and credit scores
  • Job related questions and income earned for the year
  • Assets, trying to figure out how much they have to spend and how much they would have in reserves

The loan officer would then compute the qualifying ratios and if everything else looked good, would then give out a pre-qualification letter. When I do a pre-qualification, I go into more specific questions. ~ Jeff Belonger's mortgage questions ~ I go one step further and talk about your goals and budget. ~ Knowing how much of a mortgage you can afford ~

 

 

Pre-Approval Letters

The pre-approval will go a step further. The items mentioned above would be collected by the loan officer and reviewed. The loan officer would then compute such figures and run the loan through DU or LP or DO.  (delegated underwriter/loan prospector/desktop originator) These are names of automated underwriting systems used by lenders. And if the system says approved, a pre-approval letter is issued.

 

 

My problem & issues with the process mentioned

Let's say the loan officer doesn't properly know how to compute income. A borrower gets paid twice a month and not every 2 weeks, which could change the qualifying ratios. Or if the borrower just changed jobs 10 months ago and gets overtime with the new job. It can't be used properly when computing income ratios. What about a large deposit that was just dumped into the savings account, yet the loan officer didn't catch this and it can't be verified.

In my opinion, a real bonafide pre-approval is one that is underwritten by a qualified underwritten or reviewed my a manager in some cases. Anyone can input data into the system and hit the button to get an approval. But if the wrong information is entered, then what?  A denial? 

 

 

Food for thought - I get about 2 e-mails a month from buyers that were pre-approved, after giving their pay stubs, bank statements, and W-2's to the loan officer. Two months later, these same people are denied the day prior or the day of settlement. It happens people and you just need to be careful, no matter what letter you receive. Anyone can fling around the terms, "no problem", "I guarantee", etc. Get to know certain red flags : Mortgage & Real Estate Red Flags

 

 

Conclusion :

pre-approval letter not only is different than a pre-qualification letter, but could have different meanings from different loan officers. There are some loan officers that say they can't underwrite a loan unless you have an agreement of sale. Some who are brokers say they can't do pre-approvals because the lender buying the loan from them won't underwrite it unless it's a full package with an appraisal. But these same loan officers give out pre-approval letters, because they reviewed the information themselves.  Key reminder : Lenders have their own lender-overlays and definitions.

In my opinion, stop listening to which piece of paper is valid and learn the details. Education on this topic in my opinion is very critical. And if you want to get technical, a commitment letter would be the best letter out there, because with most companies, this is issued by the underwriter. Another term would be conditional commitment letter.

 

 

Just remember : Your pre-approval letter is only as good as your loan officer....

 

 

**** This article is of my own opinion and how I view the differences mentioned above****

 

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Copyright © 2011 by Jeff Belonger of Infinity Home Mortgage Company, Inc

Comment balloon 47 commentsJeff Belonger • March 15 2011 08:02AM

Comments

Pre-quals are toilet paper right?....sorry...thats what i've been told by the old-timers.....:)

Posted by Robert McArtor, Top Listing Agent for Baltimore and Harford County (RE/MAX Components - Fallston Maryland) almost 10 years ago

I remember commitment letters.  Thanks for a great article, Jeff.  You need to make sure the buyers are "solid".  And, as you said, the letter is only as good as the loan officer.  (Shudder.)

Posted by Suzanne McLaughlin, Sabinske & Associates, Realtor (Sabinske & Associates, Inc. (Albertville, St. Michael)) almost 10 years ago

I just went throught this again on another closing that was delayed again & again due to the selling agent & her lender not having it together..i was upset & my sellers were crazy...i said it was a CONDITIONAL commitment letter & the agent fumed at me...we were delayed for closing 7 more days...this agent is a huge red flag to me now!!  thanks Jeff

Posted by Ginny Gorman, Homes for Sale in Southern RI and beyond (RI Real Estate Services ~ 401-529-7849~ RI Waterfront Real Estate) almost 10 years ago

Pre-qual is just fine with me thanks.  I send buyers to lenders for a "credit review".  I select the lender based on the buyer's search location, need for help, type of loan, etc., and the loan officers' company's offerings.  Not all mortgage companies/banks are created equal. 

When I get the word back from a loan officer that the buyer

"Will be ready in about 6 months".

"Is good to go".

"Credit messed up".

etc., etc., I can then either tell the prospective buyer that they have work to do, has plenty of time to locate a great home, or we can't help them.. . .  etc.

If the buyer is "good to go", they are sent to an agent who will help that buyer begin their home search. 

Works for me.

 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) almost 10 years ago

Great blog, thanks Jeff.

Have a great day.

Adam R. Cohn

Posted by Adam R. Cohn, We actually get mortgages closed FAST! (STANDARD MORTGAGE CO.) almost 10 years ago

 

ROBERT.... . yea, I am sure you have heard that one over and over... and depending on who is handing out the pre-approval, the said thing could be stated. thanks

SUZANNE.... . well, commitment letters should be standard on a purchase sometime during the process. The negative part is that anyone can say that buyer is approved, the question is... is it true.

GINNY... . what were the reasons for this delay? Was there a pre-qual or pre-approval letter handed in on the offer? thanks

LENN.... . I am with you on this one. The only time I go for the pre-approval is if I need an exception or it's a really tough deal that one could flip a coin on.  Over the years * more recently, I have seen more and more agents put a real emphasis on having pre-approvals and I think they are misled by some loan officers on the real differences. thanks

ADAM... . thanks for stopping by and for the polite compliment.

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

Jeff, your definitions are pretty much what I understand as the difference. However, in commercial real estate nothing is solid until the commitment letter is issued. Thanks.

Posted by Michael Setunsky, Your Commercial Real Estate Link to Northern VA almost 10 years ago

Jeff, Thanks for a great post. I agree with you pre- approval letter is as good as the loan officer.

Posted by Gita Bantwal, REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel (RE/MAX Centre Realtors) almost 10 years ago

Thanks for the good post today.  Not sure every buyer knows the difference so this is information that is worthwhile.

 

Patricia/Seacoast NH & ME

Posted by Patricia Aulson, Realtor - Portsmouth NH Homes-Hampton NH Homes (BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate ) almost 10 years ago

Jeff, nice article. All buyers should read this.  John

Posted by John Fennessey, York Maine Properties (Beangroup Real Estate) almost 10 years ago

I agree that the preapproval is only as good as the loan officer writing it.  But I'd still prefer (especially as the listing agent) to received a preapproval, rather than a prequal... I'd rather know that one more step has been completed... I can still call and question the loan officer...

Most agents in our region won't even respond to an offer unless it's accompanied by a preapproval.  A prequal will likely be kicked-back.

Posted by Alan May, A moving experience! (Jameson Sotheby's International Realty) almost 10 years ago

Good post Jeff.  I spent the first 20+ years of my career in the mortgage arena as well.  I think the quality of the approval is, like you said, only as good as the loan originator.  Many who have only been in the business since the advent of DU/LP/and DO lack the fundamentals of what those decision engines are there for.  I like to call them "DU Dummies".  They don't understand how to calculate income the way an underwriter does (or should), or that the untraceable $10,000 deposit could be a problem.  Anyway, you're on the money.  Too much time has gone into a transaction to have it blown up by someone who is not experienced enough to know what constitutes a do-able loan.  Thanks again for a good post.

Posted by Mitch Gover (BidOnRealty.com) almost 10 years ago

Unfortunately I have worked with mortgage brokers who don't know the difference between a prequal and a preapproval and making me the "bad guy" with the buyer when I share the differences with them.

Posted by Gloria Laughton Allston, Realtor(NJ)/Broker(NY) (COLDWELL BANKER RESIDENTIAL BROKERAGE) almost 10 years ago

 

MICHAEL... . yes, I actually know that about the commercial side of things... have done a few in my past and depending on the project, upfront fees are even different.

GITA... .  thanks and thanks for the compliment.

PATRICIA... . well, in all honesty, I don't think a lot of real estate agents know the difference either, hence why I decided to write this post.  I have seen many loan officers that write about this subject in which I have disagreed with, mainly because one thing that is left out of the article. Was it underwritten by an underwriter or the loan officer. Just food for thought. thanks and thanks for the compliment.

JOHN... . As I mentioned to Patricia above, not only buyers, but realtors. Just my opinion and thanks for the compliment.

 

ALAN... . my question to you is if that pre-approval letter is almost like a pre-qual letter, what's the difference. Can you tell the difference? Would you ask the loan officer if it was underwritten by an underwriter?  I only ask these questions because I personally know 5 loan officers that hand out pre-approvals that an underwriter never saw... and it was because they reviewed the documents and hit that button...

So my thought process is... Agents only want to see a pre-approval in your region, but is that dictating to the loan officer to hand out a piece of paper to where they just change the name?  Because the real process for a pre-approval can take a little longer. Just food for thought and I am curious, regarding some of my questions.  Thanks for your input.

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

yes, I would know enough to ask if it was actually "underwritten", as opposed to run through an "underwriting" program.... (and thank you for the excellent explanation of that process)...

you're right, in many cases, I'm sure there are plenty of loan officers who are merely changing the header on the page... but that's why I follow-up with my phone call, especially if it's a loan officer that I don't know... (or sometimes especially when it's one I DO know, and have had past problems with.)

A loan officer that I know, (and trust), when I called and asked her to "vet" a client of mine... she said "you want me to fax you a preapproval for them??  If you say they're good... they're good... I believe you!"... I responded: "No, I want you to really run them through the process... do a REAL preapproval on them... "  So I know that there are even some good people out there, doing bad stuff, regardless of what it says on the header.

Posted by Alan May, A moving experience! (Jameson Sotheby's International Realty) almost 10 years ago

HA great explanation.  Ofter get question from my pre license students as what the difference.  A big difference is who prepared the pre qual or pre approval letter in the first place.

Posted by Richard Weeks, REALTOR®, Broker almost 10 years ago

Jeff as you know every market is different.  My definition of a pre-approval is an application has been collected along with the supporting documentation and submitted to underwriting.  When I receive the conditional approval, then Ihave a pre-approval.

A pre-qualification is a credit report has been pulled and verbal income and cash information collected.  This is run through DU and if an approved/eligible is received I have a borrower who is pre-qualified.

I enjoy reading your blogs.  Keep doing them. They are very worthwhile.

Posted by Shay Campbell, Raleigh, NC (Universal American Mortgage Company) almost 10 years ago

Jeff: Thanks for clarifying. I doubt if my company would issue a commitment letter; unfortunately we're too busy. I could be wrong but haven't heard of that being done. It would still have to be subject to the appraisal which might be an issue. I recently had a borrower demand a pre-qual. letter from me  even though they were shopping for lenders. I obliged although I immediately got a call from the realtor and I had to admit that I only had verbal information to go on. Sometimes people get it backwards. In fact, I've got a borrower still shopping for a lender even though their offer was accepted last night. I may choose to pass. Just once I wish people would understand how the game is played. Again, thanks for the post. They are always educational!

Posted by Paul McFadden, Pest Control, Seattle, WA. (Responsive Pest Control) almost 10 years ago

 

MITCH... . I like that... "DU dummies"... but you hit the nail on the head. So many have used DU/LP as a crutch and if they, the loan officer, makes a mistake... bam. Any company that I have been with, who lets a loan officer use DU/LP to get their answer... and wants a pre-approval, basically a commitment letter... then an underwriter needs to review it first. Even if it's a junior underwriter. I just don't think a pre-approval should be based on a loan officers decision. Now, if you are that damn good. an argument can be made. But how many stories have we heard that someone was pre-approved and a few months later, they were denied. I know things happen. But not always. And thanks for the compliment.

GLORIA... . I am sure not all loan officers either know the difference or just don't care to... or that they just want the deal bad enough, that they will say anything. And for you to have to be the one to explain it, it's just not right in my opinion.

ALAN.... . I figured you would ask those questions. I just wasn't 100% sure based on your comment. I have no problem when a realtor asks me questions like that. And thanks for the story and thanks for coming back to the conversation.

RICHARD... . I am sure we could spin so many things and find different definitions and reasons... but this one gets me the most, especially after I hear some of the stories out there. thanks

SHAY.... . From what you stated, that is a very good way in going about your business and nothing wrong with that at all. For the most part, I am very comfortable when I hand out a pre-qual based on my questions, the credit report, and some of the documents. If I don't feel good about the deal or the ratios, then I will run it through DU. But again, you certainly have it down to a good science.  Thanks for sharing and for the kind words & compliment.

PAUL.... . of course it would be subject to the appraisal if one hasn't been underwritten. And yes, those still shopping for a mortgage after their offer has been accepted, definitely gets under my skin. Some people just think it's like shopping for a car.  And thanks for the compliment.

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

if the loan officer cannot properly compute income and/or check deposits they they need to buy a ticket for that train heading out of town, or in this case our industry.

there's always micky d's...i hear they're hiring

Posted by Jay Beckingham, Seniors ROCK! (Christensen Financial Mortgage) almost 10 years ago

I am at the point where I think they both have evolved into a useless piece of paper. To me it has become the same as the 3% down payment you send in with an offer that is scanned and sent in. At best they are place holders and commits no one to anything. If the pre-aqproval letter is a true pre-approval letter they should only need a 5 day loan contingency just to sign docs. We could also send in with the bid a video showing that he can walk to his car. For a true pre-approval letter they should spend the 30 days the loan companies need and have the approval for 90 days with verification of maybe 2 or 3 items. The underwriter should not have to get involved again

Posted by Robert Schmalz, Cal. Lic Broker (West Los Angeles Real Estate Group) almost 10 years ago

great points. my loan officer will not issue a preapproval letter until the buyer has provided her with all docs needed and she has an approval or a denial. she makes sure the numbers and ratios are correct before she gives them to me. as a result, in the 5 years i have used her, i have never had a loan preapproved and later denied.

Posted by Dee Neal, Atlanta Area Real Estate (Palmer House Properties) almost 10 years ago

How true that the pre approval letter is only as good as the loan officer. Commitment letter all the way.

Posted by Les & Sarah Oswald, Broker, Realtor and Investor (Realty One Group) almost 10 years ago

Jeff - thanks for this post. This just came up the other day for us. I am forwarding this post to my new customers who were a bit confused about the two distinctions. Nice job.

Posted by Robert Hammerstein -201-315-8618, Bergen County NJ Real Estate (Christie's International Real Estate ) almost 10 years ago

Yes, so true, not all are able to service a particular client and after a recent experience, the temperment fo the loan officer can make a huge difference. Who needs a mortgage expert adding to the client's stress level?

Posted by Janice Roosevelt, OICP ABR, ePRO,Ecobroker ( Keller Williams Brandywine Valley ) almost 10 years ago

Jeff:
 I am going to agree with Jay on comment # 20. (You and I have discussed this topic, and I think your post is excellent)

Our company will not underwrite a file without a complete file including the appraisal. Having said this.....

I will not give a Realtor a pre-whatever you want to call it....unless I have seen income documentation, asset documentation, and run credit and DU. (the EXACT same documentation required by the underwriter)

If I can't figure things out from there well enough to let the Realtor know that the loan will be approved? ....then...

could someone please hand me that McDonald's application?

Knowing how to calculate income is pretty basic stuff in our job, don't ya think?

 

Posted by Janet Guilbault, San Francisco Bay Area Direct Mortgage Lender (Platinum Home Mortgage Company) almost 10 years ago

Choosinga lender is such an important step in buying a home, and many times people get what they pay for. I would hope that most lenders would be competent enough not to make such egregious errors or they won't be in the business very long!

Posted by Torgie Madison, Websites and Contact Management (Quicksilver Real Estate Solutions, LLC) almost 10 years ago

Another awesome post, Jeff! This is SO true and, I'm sure you'd agree that the whole "not worth the paper it's written on pre-qual" became a HUGE problem over the past 5 years or so because everyone and their mother was getting into the real estate or mortgage biz because it was "easy money"-HA HA! Sometimes I can appreciate the NMLS : )

Have a great week!

Gina Lemos

Posted by Momentum Realty, Orange County CA Real Estate Agent (North Orange County CA Real Estate Specialists) almost 10 years ago

Hi Jeff. Regarding your point, "I get about 2 e-mails a month from buyers that were pre-approved, after giving their pay stubs, bank statements, and W-2's to the loan officer. Two months later, these same people are denied the day prior or the day of settlement." This happened to a young couple I was working with. Once they had their preapproval letter, we searched for homes in their price range. We found the perfect home (they loved it!), made the offer, and their offer was accepted. This was to be their very first home and they were extremely excited, showing family and friends their new home. Two weeks into escrow, the lender called to say, “Oops! We missed something on your credit report the first time we looked at it… and now realize you don’t qualify for any loan. Sorry.” They were heartbroken, and mad! They, nor I, would have wasted our time and energy if their lender had performed their job more thoroughly from the start. Yep, this kind of thing does happen, and it’s disheartening and infuriating.

Posted by Bill Burchard, Broker, Realtor, Representing Buyers and Sellers (3B Realty: 951-347-3818, CA) almost 10 years ago

Great information. Not everyone in either industry gets it. That's why I use the lenders I do, and cringe every time a buyer comes in with their own lender. Like everything else, the majority of lenders do a good job. I just seem to be having a "run" of the others lately!

Posted by Chris and Berna Sloan, Tooele UT (Group 1 Real Estate) almost 10 years ago

WOW! GREAT INFORMATIVE POST. SO MUCH GETS CONFUSED THESE DAYS CLARIFICATION ALWAYS HELPS.

Posted by Tamara Schuster, Realtor Broker - Naperville (Naperville Glen Ellyn Lisle Plainfield Wheaton Illinois) almost 10 years ago

There is a catch 22 here.   First, any great LO's word should be good as gold.  Good LOs should know what will get approved and what won't.  However, with that said, the commitment can only come from the underwriter.

Most lenders these days won't underwrite a file without an appraisal.  I've had a few files that I thought were "iffy" as in might get approved if the u/w is in a good mood and got real commitments issued subject to appraisal as I wasn't comfortable issuing any kind of prequal or preapproval.

The catch 22 comes in because borrowers are not as committed to lenders, so many banks and LOs don't want to invest the time associated with doing "real approvals" if the borrower isn't equally as committed.  Nothing sucks more than spending hours actually getting someone approved only for them to start rate shopping you over $50 bucks after the fact.

Borrowers don't understand that even though the mortgage itself is a commodity, the act of getting a mortgage is not. 

The other issue is that mortgages are so complex these days that it really is hard to pre-approve anyone.  Realtors and borrowers need to understand that they are borrowing large sums of money and the process takes time and needs to be taken seriously.

Posted by Russ Msrtin, Residential Mortgage Advisor (Perl Mortgage) almost 10 years ago

Hi Jeff-

I have had realtors try and pressure me to get them pre-approval letters prior to verifying all of their income or asset documents and I always refuse because the last thing a good loan officer wants to do is to issue a pre-approval and have the loan blow up and have your good name and reputation blighted.

A good loan officer knows when to just say NO-

Chad Ronning 612-250-1544

Loan Officer with Guaranteed Rate

Posted by Chad Ronning, Conventional, FHA, VA, USDA (Guaranteed Rate Mortgage) almost 10 years ago

In Arizona, the new AZ Pre-Qualification form is now part of the Arizona Real Estate Contract.  It has boxes that are checked if the income, assets etc have been verified.  Real step up from the form used in the past.  You still have the same problem, as you point out Jeff.  If you work with someone who doesn't know how to pre-qualify someone correctly, the form is irrelevant.

Posted by David Krushinsky, AZ MB-0949619 MLO NMLS #202115 (Dk Home Loans, LLC) almost 10 years ago

HI JEFF:  GOOD!

Interesting that Alan's comments are similar to mine in our conversation yesterday. The language and processes in different areas are showing up in these comments.

It is a disservice to the seller to take an offer only to find out four weeks into the deal that the buyer isn't able to purchase the home. Some agents and LOs still operate with a motto of "let's try it and see if it sticks".

I am deeply sympathetic with Russ in comment #32: it would be very frustrating to do all the work for the offer and then lose a buyer over a perceived discount from someone else. It's best for everyone when a buyer establishes a relationship with an LO long before writing an offer on a house. AND agents shouldn't undermine those relationships with a "let's try my guy".

Posted by Leslie Ebersole, I help brokers build businesses they love. (Swanepoel T3 Group) almost 10 years ago

Pre-approval is ALWAYS desired with its depth of information that is required to come up with something.

Posted by Gary Woltal, Assoc. Broker Realtor SFR Dallas Ft. Worth (Keller Williams Realty) almost 10 years ago

 

JAY.... #20 . .  I understand that get that part of your argument...but what about the pre-approval aspect of it... does it stop with the loan officer or the underwriter in order for it to be a pre-approval?  thanks

ROBERT... .  okay... so we do exactly that, that it takes 30 or 45 days to get a real approval. So then you go back and make your offer? In many cases, that house could be sold. Maybe just do a full application and go through the whole process with a property address of TBD... but if you read some of the comments, some lenders won't underwrite a loan with no property address. So, not back to square one. Read Shay's comment, #17... this is how it should be for many... which means a pre-qual is not a bad thing. But again, it comes down to competent loan officers. Thanks for your feedback...

DEE.... , sounds great and that is a great track record. But curious, you said.. until she has an approval or denial. After your loan officer runs the numbers or after an underwriter actually underwrites the loan?  Again, just curious... thanks

SARAH.... . yes, a commitment letter can be a great thing. But that can take time... most lenders aren't set up for this on every deal.. maybe a case by case.. so unless the processing and approval process is done prior to the buyer finding a home, then what? Will the sellers put the property on hold, waiting for a commitment letter?  Or are we talking about a normal time line to where they are pre-qualified, sign contracts, and have 20 to 30 days or so to obtain a loan commitment?  thanks

LISA & ROBERT... . what exactly came up with your client?  And thanks... I hope this helps them some. If they have any questions, they can certainly call me. I would be glad to answer any questions. thanks

JANICE... . I don't need anyone to add to my stress level, I can do that myself.. lol

JANET... . first off, not all income... tax returns for a very complicated buyer can be difficult at times... but yes, for the most part, income should be easy. Secondly, yes, we did talk about what your company won't allow.  So, question for you.. you said you will collect pay stubs and other documents... after you review these and credit, do your calculations, what do you call your form? If the underwriter doesn't look at it because it's not a complete file and with an appraisal.... but you have reviewed documents and run it through DP/LP... what do you give out?  thanks

TORGIE... . damn right it's an important step when buying a home... but some loan officers make it sound extremely easy at times... and I guess those are the ones to be leery about. thanks

GINA....aka advisors Choice...#28  .. yes, many got into this business because it was easy to make money.  But after the national testing and such, we still hear stories of those that were pre-approved and denied a month or so later... and sometimes on the most basic issues. And thank you very much for the kind words and compliment. thanks

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

Jeff: Because of the confusion in our industry between prequalification and preapproval I have elected to call it neither.

I write a letter (with cc to Realtor) outlining EXACTLY what documentation I have reviewed and have on file (tax returns, income statements, pay stubs, bank accounts etc) I say that I have run a credit report and report the results (the scores). I say that I have run DU and report the results. 

Then I say that based on analyzing the file, it is my opinion as a loan officer that this borrower will be approved to purchase the property based on $_______________ and let them know the length of time I believe it will take to close the loan.

I tell them it is subject to the appraisal and final underwriting by our bank and I will often write a paragraph about the borrower as well.

 I realize you would not call this a preapproval.

I guess it does not matter WHAT you call it if everyone involved knows exactly what the loan officer has accomplished by the time the buyer is making an offer. I believe a letter with this kind of detail accomplishes this goal.

This approach was taught to me by an AR member who was a lender in our area for many years, then became a Realtor. I also had MFR (my favorite Realtor) help me tweak it with some specific compelling words to dazzle sellers. It helps to be associated with my company (a recognized "brand" with a good reputation).

This letter alone has won bidding situations where borrower was not the high bid. It has convinced sellers and agents to accept an FHA offer when they said they wouldn't.

 It is powerful, and it works.

 

 

Posted by Janet Guilbault, San Francisco Bay Area Direct Mortgage Lender (Platinum Home Mortgage Company) almost 10 years ago


BILL.... #29.. .  that is one main problem with the pre-approval letter as opposed to the pre-qual letter. Was the loan ran through DU/LP?  You get the yes or no there... and if it's a FHA or USDA deal, it can be manually underwritten. What kind of mortgage was it?  Hey, people make mistakes, hence another reason why having more sets of eye balls on the deal, the better chance of less mistakes. Question, what was the issue that appeared on the credit report that killed the deal?  I am very curious.... I have seen loan officers give lame excuses at the end just to cover their asses also... thanks

CHRIS... . no, not everyone in this industry gets it... and thanks for the compliment...

TAMARA... . as long as the clarification is correct, not misleading. Just remember that because I have seen some well-written posts that sounded good, but were either wrong or misleading.. especially when that person's opinion comes across as a fact. Just food for thought... and thanks for the polite compliment. thanks

RUSS... . I agree, ones word should be gold. The problem is, so many use that to their benefit to get consumers through the door by using words or phrases such as... "I promise"... "no problem".. "I guarantee".... Secondly... you hit the nail on the head to why some loan officers might not care as much, no matter who they are dealing with... because they don't want to truly invest the time needed in each deal... they go for quantity, thinking if they lose 1 or 2, they will be covered because they have a few more closing. And yes, the rate shopping sucks.. for me, it's very very rare once they do the application with me. In fact, I can remember only losing 2 people ever... but during the normal shopping process, when I haven't done an application as of yet... it can happen.. thanks for your input and feedback.

CHAD... . shame on those realtors wanting you to issue anything prior to screening the borrowers properly... good for you for standing your ground, not giving in. thanks

DAVID... .  lol.. it cracks me up when they set up checks and balances that aren't fool proof... maybe it's the fools that make this up that we need to be worried about. You hit the nail on the head... all the correct boxes in the world could be checked, but if I can't qualify properly, those checked off boxes mean squat...

LESLIE... . that was my point... what you heard was not a national thing, but a local thing for purchases... and that it was on the contracts. Maybe we'll see more of this... but in all honesty, does it make any sense.  Okay, so instead of my pre-qual or pre-approval letter, you just want me to check off boxes on a separate form that is attached to the agreement of sale? So that stops????? what.... thanks for your feedback... between you and David, I need to add a disclosure saying that pre-approvals aren't dead, but could be area specific with restrictions... thanks

GARY... . sure, this is more desirable than a pre-qual.. but if I didn't take my proper steps to insure that it's correct and real, how do you know?  It just has a different title or name on a piece of paper... thanks

JANET...#38..  .  confusion or not... it just comes down to a good loan officer that reaches out to both real estate agents to answer any questions... and one that knows what they are doing. If you still didn't know how to read credit and calculate income, the letters that you wrote would just be a smoke screen also. Glad that you have success with them.  What would be worse is if someone handed out forms that said... Guaranteed Loan Approval.. which I have seen.. nothing is ever guaranteed, even if I put my stamp on it.. my name, my reputation....Just so many people think that would hold up, when it comes down to that individual and or their company...  and who looked at what...   thanks

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

Great points Jeff. Preapprovals are only as good as the LO that actually prepared the preapproval. I have had clients come to me more than once telling me the LO at another bank said they were preapproved and after a few questions I know there is no way they can get approved.

Posted by Roy Paeth, Just a regular guy helping real people! (Keller Williams Inspire) almost 10 years ago

HI Jeff - Whenever someone talks to me about pre-qualification or pre-approval, I always try to get info about their definition of the term since there is so much confusion.

BTW, I enjoyed reading the historical posts that you linked to.

Posted by FN LN almost 10 years ago

 

ROY... . yes, that is the worse when someone comes to you already pre-approved and you start asking questions and you are like... huh?  I don't think so. But, depending on the reasons, I sometimes say... "I highly doubt it, but you just never know. From my experience, I don't see it happening and I see red flags."  I just don't ever want to say... "no way"... It's almost like saying, "I guarantee". But I definitely know where you are coming from.

MARC... that is a wise move on your part, as long as the loan officer is upfront with you. And wait, someone actually clicked on my links and read them?  ;o)  Hey, thanks for the kind words.

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

Jeff, you have laid the issue before us with knowledge and skill.  I have offered all three types of credit letters in the 27 years I originated loans.  I had realty agents who took my word and never asked for a piece of paper--they relied on a track record of success that meant more to them than a piece of paper.  I'm sure you have built such a reputation as well.

There were agents that would have questioned the New Testament account of the crucifixion, and have demanded with Thomas to see the nail prints in His hands: NO FAITH IN ANYONE!  With some of the "pre-approval letters" they have seen, they may have found justification.

I worked with a top builder who would accept my underwriter's [a specific underwriter] word, and build.  He knew we stood behind our work because we knew and did our jobs.  I had a loan processor that my agents didn't bug, because they knew that she took care of things and would call if there were reason for concern.  That combination of processor, loan officer and underwriter is rare--we both know that; and that is why REALTORS® had better know what they've got.  Either know underwriting basics, or know the underwriter.  Either learn to calculate income (including self-employed) or build a solid relationship with a proven loan officer and his/her processor.

Paper is paper, and the words are empty until you know the source of those words.  A REALTOR® who jumps from Lender to Lender whenever a problem arises is a REALTOR® who will never have more than a piece of paper to show the seller--never a peace within.  MORE IMPORTANT THAN PRE-QUAL, PRE-APPROVAL, OR COMMITMENT LETTER IS A LENDER RELATIONSHIP YOU CAN COUNT ON.  That is what I seek as a REALTOR®.

Posted by Fred Cope, Looking For Homes With A Smile (Reliant Realty in Nashville, TN) almost 10 years ago

When I get a pre-qual or pre-approval letter, the first thing I do is call the loan officer/broker and ask if this is a "stated" approval or if the borrower submitted proof of income/assets, etc. I don't mind showing a home to the "stated" approval. But I absolutely WON'T accept an purchase offer unless it's a "proof" approval.

I know there are a lot more items the lender has to submit to underwriting to get to a "real" approval. But why have the property tied up for a few days while the borrower gets around to verifying what he told the lender they made/have in savings? Like you said, one of the most basic stumbling blocks to the initial approval is the income. Maybe they told the lender their gross including commissions which underwriting won't accept. Maybe they started a job a month ago after a 9 month gap of unemployment. Maybe they started a job 4 months ago in an entirely new industry after a gap of income. Maybe they're including child support income that they only get once in a while from a dead-beat spouse. I've seen a lot of things trip up an approval that I've received.

Posted by Aaron Johnson, Join The Home Team! (Tri City Home Team / The Force Realty) almost 10 years ago

Jeff - I want to thank you for educating me (about the commitment letter). The differences here will become part of my Buyer's Booklet.

Here are my questions:

(1) How often is it that a loan officer will take the file to go through the entire process to receive a commitment letter?

(2) Why dont they do that?

(3) How "full proof" is a commitment letter? assuming after the process there is no other activity on the buyer's end  to hurt the commitment?

(4) Does a commitment letter "expire"?

(5) Getting a commitment letter doesnt mean the buyer has an interest rate lock, right?

Posted by Loreena and Michael Yeo, Real Estate Agents (3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co.) almost 10 years ago

 

FRED & AARON... I will reply sometime today... just wanted to jump to Loreena's questions...

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

 

LOREENA... . well, most loan officers will only get a commitment letter done once the file has been underwritten with an appraisal and title. If you read the comments, some can't even do a real pre-approval or commitment letter unless there is an appraisal. A normal process of a loan should take about 2 to 3 weeks... if that loan officer has 95% of the borrowers documents.. there are a few checks and balances that need to be done during the process and if not done prior to underwriting, could still kill the deal after it's underwritten. Example... the 4506t... to where the lender is now getting transcript copies of the tax returns from the IRS. Why is this crucial and important? I had a borrower that was properly pre-qualified... asking detail questions about their income. Both had full time jobs that were W-2'd... yet one had a side job that lost money. It was brought to our attention until we received the IRS transcripts back.. now, 2 things... tax returns could have been collected, but at the time, weren't required with W-2 people, who are salaried.. secondly... I have known where someone forged the tax returns, taking negative income off.. so even if the tax returns were collected and someone did this... you won't know until the IRS transcipts came back. I one had a borrower forge their W-2 forms in 1997, combining their total income into one income.. and had a co-worker intercept our phone call when verifying income. We caught onto this... but she almost got away with this. Some people will do desparate things....

So.. regarding your questions.. I think I answered #1 ... ps.. there are some companies that say they can get a conditional commitment letter in 24 to 48 hrs. It can be done, but on every single file?  Unless a great team and process set up, that is hard to do. It costs extra time and money to have that kind of set up. It's more of a service thing if that company does do this... to gain more business.And I think # 2 is answered, because it takes time away from the files that have been in process and will be closing. Reason why many companies want an appraisal, because this shows a better chance of being a real deal...

#3... never fool proof, hence why most have conditions on them. If every condition is met, then it should close. This is usually considered a "clear to close"... that everything is in, has been reviewed, etc, etc.

#4.. yes, all commitment letters expire and have expiration dates on them. Credit, income docs, and the appraisal are the biggest ones. Usually you will see 90 days pertaining to credit and some other docs. But you will still need a paystub or two prior to settlement, if over 2 weeks old and that most lenders will verify employment or again 2 days prior to settlement... so this could kill the whole deal, especially if that person just quit or was fired.

#5.. no, just because one has a commitment date, doesn't mean one is locked. It will say locked or floating on the commitment letter and how long the rate is good for... most lenders want rates locked 5 days prior to settlement.. I can see 3 or 2 days prior...

Hope this helps some... thanks for stopping by and I hope this helps some. Now deposit $20 into my profile.. lol

 

Posted by Jeff Belonger, The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans ( Social Media - Infinity Home Mortgage Company, Inc) almost 10 years ago

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