Even before an offer is accepted, everyone in a real estate deal depends on the buyer's

PreApproval letter...should they?

This question comes up every time a buyer starts looking at houses armed with a Pre-Qualification or PreApproval letter. Realtors ® and sellers often don't know how to tell
what the buyer's pre-qual letter really represents and what additional questions should be asked.
PreApproval dependability continues to affect a high percentage of financed deals. When you know what to look for in a buyer's PreApproval, you'll also have better insight to Financing Contingencies.

Many PreApproval and "pre-qual" letters from lenders may as well be written on a cocktail napkin.
That's because without knowing if the buyer's current Income, Assets, and Credit have been thoroughly evaluated, that's all
they may be worth.
Many Realtors ® think that a PreApproval goes a step or two further than a Pre-Qualification.
Not really.
Until we know what actually goes into either one, both are just vague terms that carry more assumed weight than they should.

To start our discussion, it's important to know the difference between :
- Pre-Approval and/or Pre-Qualification
- Full Mortgage Application
- Mortgage Commitment
PreApprovals and Pre-Qualifications are preliminary estimates of mortgage affordability based on information a buyer has
provided to the lender.
They are neither offers to lend, nor agreements to borrow.
By definition and function, they are prepared before buyers submit an offer on a specific property.
For our discussion today, I am using either of the two terms to indicate the same initial estimate of affordability.
Some Mortgage Originators provide PAs and PQs before fully
evaluating a buyer/borrower's true financial picture. This is often seen with PreApprovals generated from online lender sites.
As you'll see shortly, a thorough and dependable PreApproval contains most of the elements needed to turn into a supported Application when a purchase contract is accepted.
According to the CFPB (Consumer Financial Protection Bureau),
the Federal Agency that oversees all things mortgage-related, borrowers have made loan Application when they have provided just the following 6 pieces of information:
           1 - Name(s)
           2 - Income
           3 - Social Security number (to obtain credit report)
           4 - Property value (estimate, not yet an appraisal)
           5 - Loan amount sought
           6 - Specific property address
Note that none of these items necessarily has to be verified in order for someone to have made a legal application and receive mandatory initial disclosures.
The property address is usually what turns a loan inquiry into a loan Application, causing the borrower to receive CFPB-required disclosures before continuing.
Therefore, a buyer can comply with the purchase contract's Financing Contingency requirement to make timely loan
application,yet not have provided any supporting documentation.
Are you starting to see the flaws in the system?
Before sending an Application to Underwriting departments,
lenders must still ask for and receive followup information to support anything that's in the Application. This can include tax returns, bank statements, employment verifications, letters of explanation, and anything else needed to verify what's been submitted.
At this point, further progress depends entirely on how quickly the buyers submit their documents.
And remember that the contract's Financing Contingency
clock is constantly ticking while all this is going on.

Only after the full Application is submitted to Underwriting and it looks good for final Approval, can a Mortgage Commitment be made by the lender. At Underwriting, buyer, property, and contract details are checked for compliance with specific loan program guidelines.

A Mortgage Commitment (or denial) is the only document that provides buyers with enough information to decide whether to continue on toward closing, or fall back on the Financing Contingency and terminate the deal. Remember that the contract specifies the date on which the contingency expires, ending those buyer options.
Even then, there are still conditions to be met before closing. It is almost impossible for a Mortgage Commitment not to have conditions, which may include requests such as:
  - Proof of homeowners insurance
  - Most recent bank statement showing money for closing costs
  - Financial statements from the property's HOA
  - Pre-closing refreshed credit report showing no new debts
  - Evidence of clear title and lenders title insurance
  - Letters of explanation for items questioned by Underwriting
Not meeting all conditions will prevent the buyer from receiving  final Approval and a Clear-To-Close (the last step before closing and funding).
If the buyer's Loan Originator didn't think ahead to possible closing conditions (based on a buyer's true financial picture) when doing a PQ or PA, the deal could still fall apart after everyone has spent 5 or 6 weeks waiting for closing.
Back to our original question and topic -
As discussed above, it is very important for Realtors ® to know how to read a buyer's PreApproval so you, the seller, and the Realtor ® on the other side of the deal can figure the chances of it actually becoming a fully Approved and funded mortgage loan.

Here's what to look for in a REAL PreApproval:

       - Date prepared and name of lender
      - Buyer/borrower name(s)
      - Purchase price
      - Loan amount
      - Term and structure of loan (30 year fixed, 5 year ARM, etc)
      - Occupancy (primary, second home, investment)
      - Type of loan (conventional, FHA, VA, USDA)
      - Loan or file identification number
      - Name and contacts of person who prepared it

And here's what to do when you receive a PreApproval
from a buyer:
First, make sure ALL the above items are included - then email the person who prepared it and ask :

-  Have available funds for down payment and closing
   costs been verified?

-  Do the buyers qualify for any other loan programs than
   the one indicated on the PA? (Your "Plan B", if needed)

-  Has this file received initial processing and preliminary
   Underwriting review?
And VERY importantly here in South Florida :
- Have you allowed for property taxes, home-wind- flood
   insurance, and any HOA/condo fees and dues?
If so, how much?
Knowing how to read and respond to a PreApproval or pre-qual letter can save you significant time and effort on your next financed deal.

Call me when you first start working with new buyers.
Let me provide them with a solid PreApproval that sellers and Realtors ® can trust.
Well-informed and comfortable buyers, sellers, and Realtors ®
make our deals so much smoother.


"Serving Naples, FL Buyers and their Realtors®"

Chris Carter                      Mortgage Advisor / Originator  NMLS 861361
  239 898-5455 cell
Geneva Financial, LLC
Mortgage Bankers
NMLS 42056
Corporate Headquarters:
1018 East Guadelupe Dr
Tempe, AZ  85283
  © 2017 Chris Carter


November 9, 2017


Chris Carter
Mortgage Advisor
and Originator

NMLS 861361
239 898-5455 cell
Naples, FL


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