Pre-approved… really?

I’ve seen quite a variety of lender letters… many not worth the paper they are printed on. What is a pre-approval and why does every loan officer claim his borrower has one? Why should it matter to agents and buyers and sellers?

Here’s my take on defining:

Approval: actual loan commitment, with purchase contract and appraisal and a complete file reviewed by underwriting. Usually a list of conditions are attached, which can matter… especially those that relate to the buyer and not the property.

Pre-Approval: actual loan commitment issued by a bona fide lender, after underwriting a fairly complete file, lacking just a property address, purchase contract, and appraisal. Usually some other pre-closing conditions exist but a serious pre-approval will mean taking care of buyer related conditions such as copies of rent checks, for example.

Pre-Qualification: an opinion letter from the loan originator or lender, identifying what has been reviewed (hopefully a complete credit report, loan application, etc) and the loan program (ie LTV and max purchase price), and stating that the buyer qualifies for the lender’s loan program.

Now, why should we as buyers agents or listing agents care much about the type of letter we get? Because I’ve seen pre-qual letters titled “Loan Approval” from mortgage brokers who had just one conversation with the borrower while they were driving and distracted… what are the chances of that conversation having covered everything and no surprises popping up after we’re under contract with this buyer? And the other reason, because if problems pop up often the originator is reluctant to tell anyone until the situation is hopeless and several weeks have passed.

A good originator will, if using Fannie Mae’s Desktop Underwriter for example, write a decent pre-qual letter that identified the loan program and the amount of documentation DU requests, if DU’s decision was “approved – eligible”. This type of letter can be golden, because as long as the application was correct and complete, and the documents requested are submitted, a typical underwriting review of this type of file is routine.

A manually underwritten loan can be a bit more involved… and poor processing may result in a conditional loan approval with some conditions that the buyer can’t possibly meet. That’s not approval… in my book, it’s a good step but what are the conditions, when will the buyer satisfy them, and let’s hurry up and get them all and get the file back to underwriting. The underwriters hate this “piecemeal” processing, it happens when originators and processors are not doing their job and making sure the buyer’s needs and abilities are compatible with the designated loan program guidelines.

Getting a lender letter with the offer is great, but listing agents (and buyer’s agents!) should look at it closely, and ask questions if needed. There’s no reason to simply accept anything on paper, even if it’s a buyer’s market… since the next buyer is unlikely to make an offer once the home is contingent. Find out whether it’s a true approval (unlikely), and what the originator has done so far to verify that the buyer qualifies for the lender’s program.