Pre- Qualification letter FACT OR FICTION

Pre-Qualification Letters

A pre-qualification letter implies many different degrees of thoroughness in regards to determining a buyer's borrowing ability. It may indicate that a credit report has been pulled and reviewed, but no other information has been verified. The loan officer simply used verbal information provided by the buyer, almost always over the phone. This is very common. Or the pre-qualification letter may be the result of a five-minute conversation with a loan officer that went something like this:

Loan Officer: Mr. Buyer, can you tell me about your credit history?

Potential Buyer: No problems that I know of.

Loan Officer: Great. Are you employed?

Potential Buyer: Yes.

Loan Officer: And how much do you make per hour?

Potential Buyer: I make $19.00 per hour.

Loan Officer: Wonderful. And how about regular monthly payments?

Potential Buyer: Well, I have a car payment of $125 per month and that's about it.

Loan Officer: Do you have any money you'd like to use as down payment?

Potential Buyer: No. I ‘m interested in 100% financing, like it says in your ad here in the phone book. Is this going to take long? I've got to meet my Realtor in 30 minutes to make an offer on a house and she said that you should email her my letter that I need to go with this offer. By the way, what's your interest rate?

Loan Officer: Well that depends on the loan program. Our state housing agency program is currently at 6.09%.

Potential Buyer: Okay, that sounds pretty good. My neighbor just bought a house and they said their rate was higher than that.

Loan Officer: What is the sales price on the home you are looking at?

Potential Buyer: $160,000.00

Loan Officer: Okay then, that looks like it should be no problem. I'll send your letter over right now and let's make an appointment for you to come in the next few days.

That interview was full of so many holes from a practical standpoint that I don't even know where to begin. Then there's the issue of federal regulations that were violated. But let's stick to the stuff that affects you and the Millers. This conversation could very well be the basis of a pre-qualification letter you are looking at. It's not until much later when Mr. Buyer comes in for his loan appointment that the loan officer finds out that Mr. Buyer has two unpaid judgments and four collection accounts, none of which Mr. Buyer had knowledge of. He also discovers that Mr. Buyer does make $19.00 per hour at his job-the job he just started last week after being unemployed for the last eight months and at which he works only 20 hours per week. It also slipped Mr. Buyer's mind that he is obligated to pay alimony and child support in the amount of $650 per month (this was based off his previous employment nine months ago).

Trust me that when you do the math on Mr. Buyer, he can't qualify for the $160,000 home you are trying to sell. So you have a pre-qualification letter that never should have been written in the first place and is now wasting both your and your client's time because of lack of appropriate verification of the borrower's financial status.

Some letters of pre-qualification may be the result of a more comprehensive phone application process and represent a truly creditworthy buyer. It's usually very difficult to tell the good from the bad.

Now let's explore the pre-approval letter and all that it is supposed to represent.

Pre-Approval Letters

It is generally accepted that a pre-approval letter should be a letter issued to a buyer based on a full review of the client's credit, income, and asset status. Hopefully, it also means that the applicant was processed through an automated underwriting system such as Fannie Mae's Desktop Underwriter. In that case, the loan officer would have taken a full mortgage application and have a well-documented file full of pay stubs, bank statements, proof of identity, signed disclosures, a good faith estimate, truth in lending documents, and a credit report. In short, the loan officer can offer a high level of certainty that the borrower is worthy and that the borrower is well informed of the financial requirements to close this loan and make the monthly payments.

Now let me introduce you to the root of all your problems in this area: the loan officer. I know that the loan officer is the problem child because I hear about other loan officers from Realtors all the time. I also know that it's the loan officer issuing the letters that you are trying to decipher right now with the Millers and there are no hard and fast rules regarding these letters that we (loan officers) have to follow. What should you do?

First, understand that a perfectly thorough loan officer may have issued the pre-qualification letter you have for Buyer A. This particular loan officer prefers the term "pre-qualified" and doesn't get caught up in the terminology. She just focuses on doing a good job on her mortgage applications and serving her clients to the best of her ability. That's dandy.

Second, the pre-approval letter you have for Buyer B may not be worth the paper it's written on because, unlike our aforementioned loan officer lady, Buyer B's loan officer had a five-minute conversation not unlike the one previously presented, and likes to use the term pre-approved loosely. Very loosely.

Unless you have the good fortune of personally knowing the loan officers issuing both of the letters and have great confidence in either mortgage professional, your next step is to read each letter carefully for answers to these questions:

1. Does the letter state the actual sales price of the home the buyer is approved to purchase? (If they offered $200,000 but are only approved to $190,000, there's a problem.)
2. Does it state that the buyer's credit status, income, and assets have been verified? (Buyers doing stated-income and/or stated asset loans wouldn't need income or asset verification, but you won't know this just from the letter.)
3. Does it indicate if the buyer has been approved through an automated underwriting system?

If you can answer "yes" to all of these questions, I'd say you have a letter written by a competent, detail-oriented loan officer. But more importantly, the buyer represented in that letter is probably a solid borrower. If these questions aren't answered, call the loan officer for more details. Due to privacy laws and confidentiality issues, a loan officer will not give you any specifics, but they could answer the above questions and help shed some light on the strength of the offer your clients are considering.

Letters of pre-approval are never ironclad guarantees. This can be nerve-wracking sometimes because you don't want to accept the wrong offer and let the strong borrower get away, only to go back to that strong borrower later and be told, "Sorry. We've found another home."

Just like Realtors, mortgage professionals come in varying degrees of expertise and competency and, typically, you don't get to choose the lenders who affect your paycheck each month. (I'm not making you feel any better, am I?) Let me just say, go forth, Realtor Extraordinaire. Go forth with this knowledge to guide your clients through this real estate reality and be the agent they love. You'll be fine