What Pre-Approval Should Mean

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People are understandably hazy on the difference between pre-qualification and pre-approval. Pre-qualification is a non-rigorous process whereby somebody says that based upon the information as presented to them, it appears you'll qualify for the loan.

Pre-approval should be more rigorous. For A paper, it should mean that you've fed the final loan information, including qualifying rate, income information, credit, etcetera through one of the automated underwriting programs, and it has come back with an "accept". All that is needed is the actual information on the property, and the actual underwriting.

Now due to the nature of the loan and real estate market, very few people actually get a pre-approval. Why? It costs money to do all of that, and takes a lot of time. Furthermore, it's based upon a qualifying rate. If rates go up, you have two choices: live with a higher rate or pay more money to buy the rate down, and sometimes no matter how much money you pay, the old qualifying rate isn't available. You can't lock the loan with any lender that I am aware of until you have a specific piece of real estate, so your rate will float between pre-approval and a fully negotiated agreement to purchase.

Furthermore, people have an unfortunate habit of stretching to the very limit to buy more house than they should. If you attempt to build in a little margin on the pre-approval, you're going to qualify them for less money than someone else.

Now with sub-prime lenders, they don't have Fannie and Freddie's programs to fall back upon, and if Fannie and Freddie will approve you, you shouldn't be getting a sub-prime loan. So in most cases, they have to go through essentially a full underwrite of the file, and agree to pay a cancellation fee if you don't fund within X number of months. Remember also what I told you about having an underwriter do part of their work now, part later. Every time they pick up that file is a real possibility that they will find something wrong that is a good reason not to fund the loan, or imposing a condition that the borrower cannot meet. Result: Dead loan, and in this case where you thought you had it covered, it really ticks off the client, understandably so. I'm a broker; I can always submit elsewhere, but direct lenders are stuck, and the client doesn't exactly like paying that cancellation fee, either.

Now many seller's agents are getting tired of getting left at the altar because a pre-qualification means so little, and are starting to demand a pre-approval with offers. Maybe a couple of years ago they would have gotten it; not in the buyer's market we have today. I submit an offer on behalf of a client, they are required to submit it in any case. In today's buyer's market, sellers are (or should be) eager to accept any qualified offer, but most seller's agents wouldn't know what a qualified buyer was if it bit them. Income documentation? Credit Score? Debt to income ratio? They are happily clueless, and they don't know how to negotiate for an appropriate deposit, with appropriate controls on who gets it and when. Furthermore, they don't want to drive off potential buyers, although this is exactly what requiring a pre-approval does. A good buyer's agent knows better in this current market, knows they aren't really necessary no matter what the listing says, but on the other hand they don't want to waste time with an unqualified buyer in the first place, and many of them have no more clue than listing agents what a qualified buyer looks like.

I've told you before that a large number of listing agents are lazy clods whose skills are mostly limited to getting the seller's signature on the listing agreement. They don't want to do the work they have more than once, and will drive off willing buyers who actually are decently strong, hoping for someone like King Midas to roll in so they only have to do the work once. Never mind that if they do it right, most of the time the clearances and such only have to be done once. But in the current market, driving off any willing buyer with a decent chance of qualification is a good way to have the property sit for months. Every so often, when I'm calling around to check about showing properties, an agent will tell me that they have two offers. Right. After it sits for six months, suddenly two separate groups decide it's worth buying when everything else on the market is languishing? If the two offers are real and not a figment of someone's imagination, neither one of them is good, or it would have accepted it and the property would be in escrow. If such offers are real, they're desperation checks from the sharks.

But even in a seller's market, requiring a pre-approval is counterproductive, and may mean that you are disallowing the person who would give you or your client the best offer, and may indeed be a well-qualified buyer. Yes, it may stop you from dealing with some of the "riff-raff", but the work it saves you could cost your client thousands of dollars, and you signed on to do that work. So if you're a potential seller, ask questions about this potential situation.

Caveat Emptor



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About this Entry

This page contains a single entry by Dan Melson published on February 2, 2008 7:00 AM.

"We'll Beat Any Quote" in Mortgage Loans was the previous entry in this blog.

Issues Relating to One Spouse Qualifying For A Loan On Their Own is the next entry in this blog.

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