Does Pre-Approval Mean Anything?
The Pre-Approval – the most coveted document short of Loan Approval, has had a hard time lately. Since the financial crisis of 2008 listing agents have always requested a Pre-Approval over the simple Pre-Qualification Letter to prevent deals from falling out of escrow. That’s a wise move, because a Pre-Qual really means nothing.
So why has the Pre-Approval Letter come under fire recently? Like a “lifetime warranty”, it is only as good as the company that issues it. Just this week I had two different panicked buyers call me to ask if there is anything I can do to help them. In both cases they were “Pre-Approved” for a loan, only to go into escrow and find out deep into the process that the lender will not approve their application for a mortgage. In a third, the roles were reversed. After I had informed an applicant that unfortunately he did not qualify, he informed me three days later that another company provided him a Pre-Approval Letter and was off to buy his home.
How can it be that one lender “Pre-Approves” someone yet they can’t do the loan, and in the other, a lender like my company says no way, yet another company says “Sure!”
It is very important for both those seeking a mortgage and all real estate agents to understand what the “Pre-Approval” is all about.
In theory, a Pre-Approval Letter is issued after the following:
- A credit report has been pulled and reviewed.
- Income and assets reviewed.
- The loan scenario was run through an automated underwriting system like Fannie Mae’s or Freddie’s Mac’s.
Here’s the problem: #2. The review of income and assets. It doesn’t matter if the issuing entity is a Broker or Banker, in almost every case, the income and assets of the applicant are reviewed by the Loan Originator and not an underwriter. Some big national lenders have rolled out their completely automated systems, advertising an instant Pre-Approval Letter. A human doesn’t even review those at all.
The typical Loan Originator in the mortgage industry today is horrible at calculating income. Even the test we were all required to take and pass, gave us the simplest of scenarios to figure out. Calculating income is not why lenders hire these people. Their greatest skill is in convincing you to go with them to get your financing. That is why for years I have referred to anyone you would speak with about obtaining a mortgage as a “Loan Salesperson”. They are truly in sales. If they were able to underwrite a mortgage application, the banks would save money and eliminate the expensive underwriters from the process.
In my case, I have been originating loans for 21 years and at one point thought of becoming a math teacher, yet I have one dedicated person in my office that does nothing but calculate income on all new applications. I also have a secondary manger review the calculations to make sure it’s right. It is not the math that is hard. For some borrowers, it is knowing what income can even be considered at all. That is why my company is known throughout the real estate community for specializing in applicants with complex income streams.
If the income calculations are wrong, even someone with excellent credit and verified funds may not really qualify for the loan. As with any computer based system – garbage in, garbage out – will cause the automated underwriting system to return an approval when one really doesn’t exist. Hopefully you can now see that a letter issued by a salesperson selling mortgages really doesn’t mean anything.
There’s one thing I have never been able to do in all my 21 years of providing financing to the people of Hawaii. It’s the ability to promise someone I can provide them the financing they applied for, not come through, and have them be okay with that. For me, reputation is everything. If I fail, and that includes anything throughout the process, I take it seriously and know the buck stops with me. I don’t blame it on the lender I chose for the client, or any particular underwriter. If I issue a letter saying I can provide financing, I better come through. I can’t say it’s the same for most in my industry.
Please don’t take the above as some high and mighty speech. Most originators in the mortgage industry are trained to get you in the door, and let the process take its course. The mantra of “if we can’t do their loan, then nobody can” is drilled into these people. I’m not saying that a majority of originators in the industry are purposely lying – they simply just don’t know better.
If you want to avoid a disaster, you have every right to ask the person and entity that issued the Pre-Approval Letter how the review was done, who did the review, and what their qualifications are.
This month’s Mortgage News brought to you by:
Alan Van Zee
President | NMLS #: 297154
Hawaii Mortgage Company, Inc.
Company NMLS #: 232582
firstname.lastname@example.org • www.hawaiimortgage.net