What is a pre-approval letter worth?

You would be surprised (or maybe not) by the lack of quality control when it comes to the almighty Pre-Approval Letter.

Most all Realtors require their client to come equipped with a Pre-Approval Letter before they will write an offer on a home, this seem on the surface to be a no-brainer, makes sense right? But what is the Pre-Approval actually?

Recently I provided my client (Mr. K) with a pre-approval letter. In order to provide this letter Mr. K provided me with his most recent two months bank statements, and most recent one month's pay stubs for both he and his wife. I also pulled a tri-merged credit report, and reviewed all of his documentation for accuracy. In turn I found these borrowers to be very well qualified, and was pleased to provide them the letter they were looking for conditional upon them selling their present residence.

Mr. and Mrs. K found a wonderful home, and were very excited to make an offer, and the best part in the meantime they found a buyer for their existing home, complete with a Pre-Approval Letter from another lender.

Both the sale of their present residence and their new home were to take place on the same day, August the 3rd. We completed our processing, meet all Underwriting conditions, and were clear to close a week early... you know where this is going right...

We are still not closed as we continue to wait for the buyers of Mr. and Mrs. K's home (even though they were "Pre-Approved") are not ready to close.

The other lender said the reason was that the Underwriters did not like the fact that the borrower had NSF's (Non-Sufficient Funds) transactions showing on their bank statements... duh! But weren't these banking statement need to be reviewed before they issued a Pre-Approval letter? Guess not with this lender.

Now we have a domino effect, at least two houses waiting to close (maybe more), I can think of three commission besides my own that haven't been paid, and allot of daily anxiety for Mr. and Mrs. K.

The moral to the story is; if as a Realtor you are going to emphasize the need for a Pre-Approval Letter, know the source, and if it takes an additional day to get it from the lender, it's not that they are lazy, or trying to be difficult, most likely they are making sure that the letter they provide is a real Approval, not a worthless piece of paper given to appease the clients request. There is no governing body that oversees the quality control of letters provided, and no real recourse if the transaction falls apart due to lenders incompetence. I can only stress if you are going to trust your source, you'd better know your source.