Loan Pre-Approval Means Nothing
The only one I trust is one that I wrote.
I got this search engine hit:
pre-approved loan underwriter changes terms illegal
I have gone over these issues in discussing the pre-qualification.
Loan officers are salespersons. There is intense pressure on them from supervisors, brokers, stockholders and their own pocketbook to tell you what you want to hear. A large proportion of the people who ask me for a either pre-qualification or pre-approval already have a property in mind, and they get angry if I tell them it appears to be beyond their means. They should be kissing my shoes because I'm trying to keep them from making a half-million dollar mistake, or at least make certain they go into it with their eyes open, rather than just keeping my mouth shut and pocketing my commission. Most of these folks just go get their "Think Happy Thoughts" letter elsewhere.
Furthermore, if the loan officer is counting upon referrals from real estate agents for a living, now they're getting the agent angry to no good purpose. This agent thinks they have a commission check all lined up, and you're trying to talk the buyer out of it, threatening that commission check. Most Real Estate Agents do not respond well to this, I'm sad to report. I'm thinking, "Boy, I'm glad I found out now, before the default, when investigators and lawyers and courts get involved," but most agents see only the immediate check that just evaporated. One such experience is all it takes before they not only stop referring to that loan officer, but try getting any clients they may have in common away from that loan officer. This may be short-sighted, but it is also human nature.
Not to mention the fact that nothing about a pre-approval or pre-qualification is binding. In fact, until the underwriter writes a loan commitment, there is nothing that says you have a loan at all. Furthermore, it's rare for loans to be rejected outright. What happens far more often is the underwriter puts an unmeetable conditions on it.
Furthermore, there is nothing about any loan that says the terms cannot change unless there's a lock in effect. If the loan isn't locked, it's not real. Quite often, loan officers will tell people their loan is locked when it's not. Locking paperwork can be easily faked.
Finally, unless you have a written Loan Quote Guarantee, the loan officer can always decide to sock you for more in fees. The games that can be played with the Good Faith Estimate (Mortgage Loan Disclosure Statement in California), Truth-in-Lending, and all of those other forms you get when you sign up are legion. None of these forms means anything, really, in any objective sense.
Even with the best will in the world, I can't guarantee you've got a loan until I get the loan commitment from the underwriter. I can go through all the guidelines for a given program, and make certain the borrower meets every single one of them. It doesn't mean anything until the underwriter writes that loan commitment. I don't have the power to approve that loan - no loan officer does. Loan commitments are the exclusive province of the underwriter. A good loan officer can and does go through guidelines to ascertain whether there's an obvious reason that you will be turned down. If the underwriter rejects the loan, none of it means anything.
This is one of the reasons that I have written several articles explaining how to calculate what you qualify for, in terms of payment and in terms of purchase price, so that you will not be at the mercy of somebody who tells you, "Sure you can afford it," while qualifying you for a "stated income" negative amortization loan. The most mathematically correct and detailed of those articles is Should I Buy a Home Part I, while the most accessible is Can I Afford This Property?.
The stages in this process are first, the lock. If you don't have a lock, the loan is not real, and it will fluctuate with the market - every day for A paper. Once you have a lock, then it is possible to get a loan quote guarantee that means something. Even that is not absolute, however. A real loan quote guarantee is written contingent upon underwriter approval. The loan officer cannot really promise you that loan until the underwriter writes a loan commitment with conditions you can meet. What I can do, however, with a loan quote guarantee is say, "If the underwriter approves it, the loan will be on these terms" If the underwriter rejects the loan (or doesn't approve it), you still don't have that loan. You can choose another one, that you are likely to qualify for, or you can do without. I'll tell people that if the loan officer gets back to them within a week, it's likely that they're honest and they really thought you qualified for the loan they told you about in the first place. If it takes them three weeks or longer, or if they spring it on you at closing, I wouldn't believe they were honest with sworn testimonials from George Washington, Abraham Lincoln, and Mohandas Gandhi that they saw the whole thing, and it's not the loan officer's fault.
Only when you have a lock agreement, loan quote guarantee, and a loan commitment from the underwriter do you have a deal going that somebody might be able to stand behind, in the sense of being able to hold them responsible if they don't deliver on exactly those terms, and even then there are limitations. Of course, what really happens most of the time is that loan officers tell you about loans they have no prayer of being able to deliver. This is despicable, but it's the way things are. There are reasons why the situation is complex, but that's no excuse for loan providers to play any additional games to obscure or confuse something that is already complicated enough. Part of the reason that I'm writing here is that I would like to change this for the better, but the power to demand real change is in the hands of consumers, not any individual provider.
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