Why a Preapproval Letter Ain't Worth Jack Crap and What To Do About It

There are a lot of agents in Sacramento who watch what I do and copy me. I'd say these guys are pretty smart. Because what I do works. I prove it over and over. As a Sacramento short sale agent, I like to believe I'm fairly competent and good at my job. So, if I tend to set the standard for what a short sale agent should do to be successful, that's OK. I don't mind agents using my methods. I freely share because we're all in this boat together.

Last year I did almost 100 transactions. I'll probably exceed that number this year. Every time I close a short sale, I learn something from it. I analyze it. I think about it. I figure out what caused problems during the transaction and come up with solutions so I don't have to face those situations a second time. Call me silly, but this process makes sense to me. Why would I want to repeat a headache?

I'm not one of those agents who bangs her head back and forth in doorways because it feels so good to stop.

One of the larger problems I've seen lately originate with the preapproval letters from lenders. They've always been sorta worthless, but some of them should never have been written. It's way too easy for a mortgage broker to type a borrower's name into a template and print out a preapproval. There is no guarantee that the mortgage broker has qualified the borrower in the least. It doesn't mean the borrower has filled out a loan application. It doesn't even mean the mortgage broker has checked the borrower's credit report.

And don't get me started on mortgage brokers who try to wear two hats and work as a real estate agent, too . . .

Nobody wants to go through the waiting period for short sale approval and get rejected in underwriting. Not me, not the sellers, and not even the buyers. But it happens more often than you would imagine. And sometimes, the file is rejected or kicked out of underwriting for simple red flags that should have been noted at the time of the preapproval letter. Things like low FICO scores, derogatory credit, not enough time on the job.

I work darn hard for my sellers. I submit offers the bank will take. I produce short sale approval letters drawn from blood, sweat and tears. We survive the home inspection without repairs. But when that file goes to underwriting, my sellers and I want to be relatively assured that all of our efforts were not in vain. We want to close. We don't want to hear the buyer has been rejected by underwriting because the buyer was never fully qualified to buy a home in the first place. I know how those REO agents feel when they require preapproval letters from a major lender over a mortgage broker, and I know why.

That's why we request a full DU (desktop underwriting) from the buyer's lender to accompany that short sale offer. It doesn't disclose everything, but it gives a pretty good snapshot. Did you know that a desktop underwriting finding can result in a preliminary Fannie Mae approval even though the FICO scores might be too low to qualify for a conventional loan? It's true. You can't just assume because the buyer has a DU approval that the buyer will be approved, either. You need to read between the lines, apply critical thinking.

Many mortgage brokers do not even run a DU prior to issuing a preapproval letter. How do I know that? Because I have a desk full of preapproval letters with dates that precede the DU. What does that tell you? They're putting the cart before the horse. Not on my watch.