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That's because without knowing if the buyer's Income, Assets, and Credit have been thoroughly evaluated, that's all it may be worth.
As with other newsletters, I intended this to be a single-edition topic. The more I got into it, the more I realized it would take a two-part series to properly address all the moving parts and also provide some suggestions for sidestepping the built-in problems and delays that weak PreApprovals create.
Many Realtors may think that a PreApproval goes a step or two further than a Pre-Qualification. Not really. Until we know what really goes into either one, both are just vague terms that carry more inferred weight than they should.
To start our discussion, it's important to know the difference between :
- PreApproval or Pre-Qualification
- Full Mortgage Application
- Loan Commitment
A PreApproval is a preliminary estimate of mortgage afford-ability based on information a person has provided to the lender. It is neither an offer to lend, nor an agreement to borrow.
By definition and function, they are prepared before buyers submit an offer on a specific property.
In order to get a borrower informally committed to that lender, many Loan Originators will provide PreApprovals and Pre-Qualifications before properly evaluating a borrower's true and complete financial picture. This is especially true of online lender sites.
This creates false confidence in buyers and their Realtors�.
As you'll see shortly, a thorough PreApproval contains most of the elements to turn into a full Application when a contract is accepted.
According to the CFPB (Consumer Financial Protection Bureau, a Federal Agency), 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 necessarily 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 what turns a loan inquiry into a loan Application, requiring the borrower to receive CFPB-required disclosures before continuing.
Therefore, a buyer can now comply with a purchase contract's requirement to make timely mortgage application, yet not have provided any supporting documentation.
Are you starting to see the flaws in the system?
Before sending an Application to their Underwriting depart-ments, lenders must still ask for and receive followup information to support anything that's in the Application. This can include bank statements, employment verifications, letters of explanation, and anything else needed to verify what's been submitted.
This is where delays usually start. If at least some of these supporting documents haven't already been thoroughly evaluated in the PQ or PA process, parties in the deal don't know the buyer's true ability to get financing.
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 is needed to satisfy most contract Financing Contingencies. A PA, PQ, or Application will not. Check out the Newsletter Archives for further discussion on Financing Contingencies.
Even then, there are still conditions to be met before closing. It is almost impossible for a Mortgage Commitment not to have conditions.
The conditions in a Commitment may include such things as:
- Proof of homeowners insurance
- Most recent bank statement showing money for closing costs
- Financial statements from the property's HOA
- Pre-closing credit report showing no new debts
- Evidence of clear title and lenders title insurance
- Anything else to address transaction details before closing
Not meeting all conditions will prevent the buyer from receiving full 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 actual financial picture) when doing a PQ or PA, the deal could fall apart after everyone has spent 5 or 6 weeks waiting for closing.
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