Monday, December 17, 2007 - Article by: Larry Morris -
There is a lot of discussion about the need for a pre-approval letter. Most Realtors will not accept an offer on a home without one, and many will not even show a home. But what is a pre-approval letter and is it really any good?
First, we need to look at the difference between a pre-approval letter and a pre-qualification letter. A pre-qualification letter is really just the Loan Officers hunch that the borrowers are good for the loan and that a lender will probably give the borrowers a loan. They have answered a few questions correctly, have decent credit and appear to have the income necessary to make the payments.
A pre-approval letter is supposed to be more in depth and based on an actual analysis of the borrowers ability to get approved according to the underwriting guidelines that will be used by the lender for the loan selected. It often involves running the application through an on-line approval engine to get an accept or decline. With this information, a loan officer can write up a pre-approval letter and have reasonable confidence that the loan will be approved by a lender. But there are still risks.
Many Pre-approval letters are nothing more then pre-qualification letters with a pretty face. The loan officer was either to lazy to run a thorough analysis, or was rushed by a Realtor, or borrower, to come up with a letter now so that an offer could be made. In addition, the information used to obtain the on-line pre-approval might not be accurate. Often the information has not been verified by the loan officer, let alone the lender, or the information is calculated differently by the lender and ratios or reserves are no longer sufficient.
The only true pre-approval letter is the Conditional-Approval issued by the lender with all borrower conditions signed off. This becomes a commitment by the lender to loan to the borrower with an acceptable property. The only outstanding issues should be property issues: Purchase Agreement, Title and Appraisal. While it takes more time, it is as good as money in the bank.
But there is a hitch, most lenders will not give a Conditional Approval without a property address. This means that in many situations you need to rely on the loan officer to provide an accurate pre-approval letter based upon an on-line approval.
If so, ask questions. Has the Loan Officer reviewed the information in the application to confirm that they are correct? Have they contacted the employer to verify occupation? Or the Landlord to verify rental history? Are there any isues on the credit report that could affect the loan? What are the potential hitches in the pre-approval that could prevent it from being honored? After all, if you are a Realtor it's your commission. If you are a buyer, it could be your home...and the loan and rate that you end up with.
Better yet, find a Loan Officer who works with a lender who will give a pre-approval with a "property-to-be-determined". I have several. They are national banks with great rates and programs. They will even allow a rate to be locked without a property and their adjustments for 45 or 60 day locks are minimal.
Call me for your Oregon Home Loan.
Larry Morris is a Certified Mortgage Planning Specialist with Equipoint Financial Network in Newberg, Oregon.
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