Lenders resist the work of a pre-approval… what’s the difference?

From a November 12th NYT article

FOR some people, an important first step in buying a house is getting a mortgage preapproval.

That’s so true, my sellers and I want to see your preapproval letter with your offer.

But prevetting has become more difficult and confusing these days, for borrowers as well as lenders, as a result of lending rules that took effect in January.

The rules from the Department of Housing and Urban Development require lenders to issue a binding good-faith estimate of total closing costs within three days of submission of a formal loan application. The formal application is usually made when a preapproval is written.

Lenders are barred, before issuing this binding estimate, from requesting tax returns, bank statements and the like from a borrower. (In addition to the loan amount, the applicant is asked to provide only a Social Security number, gross monthly income, the value and often the address of the property.)

Many lenders are reluctant to be locked into closing costs amid declining property values, and therefore fewer of them, especially the big banks, are providing preapproval letters for a certain loan amount on a property that often has yet to be formally appraised. The problem is particularly acute for buyers who have not yet decided which property they want.

I get the system is miserable right now, but I know that if I see  a letter from a lender that references anything other than a ratified contract, a pre-liminary title report and satisfactory appraisal, that’s a pre-qual letter, not a pre-approval.  Yes, I always need to pick up the phone and speak with the mortgage broker about the clients, but I expect credit to have been pulled, tax returns to have been requested, the application and the file to be up to date and complete.

If the letter mentions anything about the client needing to submit paperwork, the letter isn’t worth tying up a property with…

Mortgage experts say that borrowers should ask lenders, early on, exactly what their preapproval process entails, and push for a preapproval — not prequalification — especially if the lender is running a credit check for a prequalification.

Ms. Smith says many banks are now issuing prequalifications no different from preapprovals, in that they contain hard credit checks and the like. But by not calling them preapprovals, she said, banks can delay taking a loan application and having to issue a good-faith estimate of closing costs. [More…]

Yes, it’s a catch 22.  But sorry, but I’m not willing to have my sellers tie up a property because the mortgage bankers don’t want to do another step they are now required to complete.  Hey, the escrow officers have to do a lot more work under the new rules too… And it’s not as if the rules are so new, that the good mortgage brokers haven’t found a way to make it work! In the end, sellers need to know that a buyer can finish the deal, not get held up.

On the other hand, if I have a buyer and I get a prequalification letter from their lender, I’ll be on the phone.  First, I’ll be talking to the lender to make sure I understand why it’s a prequalification and not a preapproval letter.  Where is the file at in terms of completeness?

If  I end up having to present a prequalification letter with the offer, you can be sure that I am discussing it with the listing agent first.  A big part of my job is managing expectations and communication, so I prefer to address it directly.

Rita Roti is a broker / assistant manager at Zephyr and can be reached at Rita@ritaroti.com

CalBRE #01224570

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