When my clients make an offer on a house, I always advise them that we need to have a pre-approval letter from his lender along with the offer in order for the offer to be accepted by the seller.
This was true when lenders were giving away loans like there was no tomorrow, and this is even more critical now a days when the lenders are going thru loan applications with a very fine comb. Sellers want to have the confidence that a buyer are financially qualified to purchase their home before they accept the offer.
My clients will then ask me what is a pre-approval letter. I can generally give a good explanation but I am really glad to read an article by George Soute on ActiveRain explaining the three types of loan letters which is listed below:
- Pre-Qualification Letter: Loan Officer pulls credit, and inquires about income and maybe bank information. From that the Loan Officer makes a quick determination as to whether the Borrower could possibly qualify for a Loan up to a certain dollar amount.
- Pre-Approval Letter: Loan Officer pulls credit, inquires about income and bank information, takes a full Loan Application, may or may not collect some documentation like paystubs. Runs all this information through Underwriter or LP along with a hypothetical Sales Price, and looks for an Approved/Eligible or Accept.
- Loan Commitment Letter: The Loan Officer does everything that he or she would do if there was a property, pulls credit, collects all necessary documents, Borrower signs a Loan Application along with disclosures, and everything is submitted into Underwriting. Everything that would be done for an actual Loan would be done except for an Appraisal, because there isn't a property yet. The Underwriter then issues a Loan Commitment Letter up to a certain dollar amount, based on a property being able to appraise later once a property is found.
Part of valuations the lenders does is to figure out the debt to income ratio a borrower has which equates to all debt payments a buyer has to make each month vs their income allowing lenders to know whether a buyer can comfortably afford a loan or not.
This is also the reason why there needs to be a loan contingency period allowing time for lenders to do detailed check on the borrowers before they will commit the fund to the purchase. Only after the lenders is committed to make the loan can a loan contingency be removed.
Any more detail? Ask your Mortgage Broker :-)
_________________________________________________________
Sylvia Barry
, Realtor, ePRO
Marin Realtor for Marin Real Estate
Marin, San Francisco North Bay
Frankk Howard Allen Realtors
website: www.SylviaSellsMarin.com
Blog: www.AllAboutMarinHomes.com
MARIN, SONOMA, S.F. BAY AREA REAL ESTATE - Beveldere, Corte Madera, Greenbrae, Kentfield, Larkspur, Marinwood, Mill Valley, Novato, San Anselmo, San Rafael, Sausalito, Tiburon; Cotati, Penngrove, Petaluma, Rohnert Park, Santa Rosa. Starter Home to Luxury Property. REO (Bank Owned), Short Sale, View Homes, Architecural Distictive Homes. Investment, 1031 Exchange. Chinese Realtor.
Great post Sylvia, very informative.
Have a great day!
Sylvia, this is an excellent quick explanation for buyers & sellers on the 3 types of letters. I'm reblogging it for my consumers ..thanks for the information
Fernando ... Glad you liked the post. I really borrowed the three levels from George Soute and adapted to what Realtors can use. So credit goes to him.
Ginny - great compliment. Thanks! This helps me with my clients.
Hi Sylvia, The FDIC website has a very different definition of Pre-Approval than the above. The FDIC states that the Pre-Approval cannot be subject to certain other additional conditions. Basically, nothing other than sales contract, property address, appraisal, insurance, title, and no material change in borrowers qualifications can apply.
Essentially, this means that the file be be fully reviewed and approved by an Underwriter, not a Loan Officer, prior to a Pre-Approval being issued. If you have a Loan Officer issuing the Pre-Approval simply based off of an automated underwriting approval, then they are not following the FDIC definition of what constitutes a valid Pre-Approval. Since the FDIC regulates all banks, I would really think everyone should be using that definition?
Hi Rodney - this why I like ActiveRain, getting expert advise. I will read the link you sent (on the way to office meeting) and possibly amend what I wrote.
The Pre-Approval letter above I quoted did mention it needs to be run through Underwriter, but I guess it does not quite say to the degree of which that they need to run by underwriter. I believe many run through their 'desktop' underwriter (yes, the automatic ones - major lenders).
I also know that pratically, buyers often face more detailed scrunity during loan contingency period and often, right before loan document is issued and even before loan was funded. These are from big lenders, such as BofA and Wellsfargo. By that time, the buyers will be scrambling for documents and hope they don't get the 24 hours to perform ntoice (in CA). This is from representing both buyers and sellers.
I am not a mortgage broker, the intention was to give my clients some high level definition of each and advise them to talk to their mortgage broker.
Thank you again, and I will go back and read the link you sent.
Have fun at your meeting. There have been a lot of postings and comments made on this topic this week. Many have stated that nothing (particularly RESPA) says that we can't issue Pre-Approvals. They are correct in that statement. However, very few lenders are now issuing Pre-Approvals at the level that meets the FDIC definition of the word. Simply getting a DU (Desktop Underwriter for Fannie) or LP (Loan Prospector for Freddie) doesn't equal a Pre-Approval. That would be referred to as a Pre-Qualification. Many are still incorrectly calling them Pre-Approvals.
I pre-underwrite every file. I don't issue Pre-Qualification certificates without first reviewing pay stubs, W-2's, tax returns, and bank statements. My certificates state that this info has been reviewed. All of this helps to better ensure a loan will actually make it to the closing table.
Thanks, Rodney, for the clarification. Yes, the lenders at Wellsfargo and Bank of America are doing desktop underwiting as pre-approval. I am not a mortgage broker, so I can't comment on that, but just know that's what I was told.
And who those letters come from is almost as important as what kind of letter they are. I get some preapproval letters without letterhead from some one-person operation nobody has ever heard of -- or worse, it's the agent's own business -- and I'm immediately skeptical.
Hi Elizabeth: Thanks for commenting! Glad to see you here :-)
Yes, I totally agree with you. For me, it depends a lot on who the approval letter comes from, and for that matter, which agent I am working with also. Have a good reputation and be trustworthy is so important in our industry!