When a buyer submits an offer to a seller, it is expected that the offer be accompanied by either a pre-qualification or a pre-approval letter from their lender. This document is meant to show that the buyer is capable of coming up with the money to actually buy the house. As straightforward as all that might sound, pre-qualification and pre-approval letters from banks are often a mine field of what many might call outright misrepresentation. As a result, sellers, as well as buyers and agents, are frequently blindsided by what was thought to be a rock-solid commitment by the bank, when out of left field, the bank comes up with some unforeseen requirement for making the loan. Buyers want to buy and sellers want to sell, but increasingly banks are making up the rules as they go along, all to the considerable delay and expense of everyone else involved.
To be fair, banks have been left holding the bag for billions in unpaid loans, resulting from the years when liberal lending policies granted loans on little else other than a wing and a prayer. It's an open debate as to whether that's the fault of the banks, the fault of the borrowers, or the fault of our legislators. The truth probably lies somewhere in the middle. But now, we may be seeing the pendulum go from one extreme to the other. The boom to bust cycle is once again in full swing. For some reason, it can't ever seem to fall somewhere in the center.
So let's start off with an explanation of what constitutes a pre-qualification letter versus a pre-approval letter and an iron-clad commitment by a bank to make the loan. But before we begin, let it be known that we aren't banks, lawyers or soothsayers of unknown conditions that someone might find as reason to take issue with what most people look at as common sense. It's sad that we need to preface all of this with that, but as agents, we've now found that you need to expect the unexpected.
Pre-qualification Letters: In the old days, this is pretty much all that was necessary. A pre-qualification letter basically stated that the buyer had spoken to a mortgage banker, and based on the borrower's representation of their financial condition, they were in a position to borrow what was needed to buy the house. It was based on honesty by the buyer and verification as well as upfront requirements by the lender.
Today, a pre-qualification letter is, for the most part, worthless. A buyer's representation of their financial condition used to go unchecked. Now, the banks actually want to see how much you make and how much you owe. On the lender's end, the requirements for loan approval are apparently in a constant state of flux. What it takes to get approved today could be completely different tomorrow. Sheer arrogance on the part of banks and the winds of political intervention with respect to the economy make this a moving target.
Consequently, relying on a pre-qualification letter doesn't even rise to the level of a warm fuzzy. As a seller or a buyer, it's a minor step in confirmation that someone will loan you the money needed to buy a house.
Approval Letters: Here's where plain English can take a backseat to reality. For some in the mortgage industry, an approval letter isn't much different from those letters you get saying that you've just won two free tickets to Hawaii. The headline of such an award is then followed by three paragraphs of miniscule legal type that incomprehensibly says why "free" isn't really free. All of us have received those offers. You know how it goes - "your approval is limited to travel days that begin with the letter Q, are subject to prior approval, and are only valid with the purchase of an additional fare at twice the price of a normal ticket."
Some mortgage companies are no less guilty of the same marketing techniques. When you see an approval letter, it's usually subject to certain conditions. As a buyer or seller, you should carefully read these conditions. In some cases, you'll find that the conditions for approval essentially amount to anything that the bank thinks might prevent approval. In other words, an approval letter might not mean much more than "we'll take a look at it."
Lender Commitment: By this point, you would think that it's all locked in. Commitment usually means just that. But we all also thought that "approval" meant approval. Well, hold on there buckaroo, because we're in a world where the definition of "is" is yet to be defined.
In a recent contract, we got a letter from a lender saying that the buyer was fully approved. You got it. He wasn't just a little bit approved; he wasn't even mostly approved; this buyer was fully approved. But on the day of settlement, the lender told us that the loan wasn't approved. It doesn't matter if you go to Webster's or Wikipedia, "fully" is something most of us identify as an absolute.
Beyond that, this lender wasn't some dot com, fly-by-night outfit, or Joe's Mortgage Company in Timbuktu. This was a well-known, international U.S. company - one that has received $45 billion in assistance from the American taxpayers.
When we called this company to find out what about "fully approved" we don't understand, we (along with the buyer's agent and title company) were repeatedly met with a voice message saying "she's not in," and then, when you're directed to the recipient's voice mailbox, you're greeted with the delightful notation that "this mailbox is full." After two days of phone calls, we did finally reach a live person (Ron) who told us that the letter we received doesn't really say what it says, and the person who signed it didn't really send it out. I guess we can see why such an organization might need $45 billion or so from the taxpayers to survive.
In short, lender commitment is also falling by the wayside, just like "I do" at the altar. But that doesn't mean that buyers and sellers are completely subject to the whims of the lending institutions. We have a few suggestions. First, don't try to borrow money from a computer. If you can't regularly talk to a real, live person, it's probably not a place where you want to do business. Second, find out what "approval" really means. These days, plain English has been subverted by institutions who believe themselves to be too clever by half. It might seem a little embarrassing or unnecessary, but make sure there are no strings attached to what a bank might call "approved." And finally, don't wait until the day of settlement to double check. We've found that the rules of the game are apparently up for grabs. We heard of one lender who cancelled settlement because they suddenly wanted the oil tank in the basement tested. You can't make this stuff up, and as real estate agents, we've got to tell you that it's simply impossible to anticipate what might come down at the last minute. We try to keep on top of it, but it's like shooting at a moving target in the dark.
Are all the lenders up to some kind of skullduggery; of course not. Most that we deal with are highly professional and very responsive. We don't mean to throw the baby out with the bathwater. Nevertheless, all may not be what it seems. Work closely with your agent, and constantly stay on top of your financing. Don't just assume the money will just show up on settlement day and the "Congratulations, you're Approved" letter means it's a done deal.
Nick Gioia | www.ngrealtygroup.com