Pre-Approval vs. Pre-Approval

Friday, I closed on a $322,000.00 short sale, Monday I close another for $340,000.00 and amazingly enough, both buyers, brought me "pre-approval letters" from the exact same lender.

Just so you are clear, these are 2 different homes, 2 different buyers but, both had the same exact lender. Now, the reason this is critical to understand is because, on both offers, I made sure to ask for a Pre-Approval Letter and, you would think that because both buyer's are using the same lender, the Pre-Approval Letters would be virtualy the same.....right?

WRONG!

Both were Pre-Approved but they had dramatically different letters. See below....

Letter # 1 (Pre-Approval)

Point # 1: Written by the Underwritter.

Point # 2: "Funding only contingent upon appraisal and home inspection"

Point # 3: Buyer has had credit verified and determined credit worthy

Point # 4: Assets have been verified.<br>

Letter # 2 (Pre-Approval)

Point # 1: Written by the Loan Officer

Point # 2: Funding is contingent upon verification of income, credit and employment

Point # 3: Buyer has been "PRE-DETERMINED" credit worthy (NOT VERIFIED)

Point # 4: Assets have been stated.

1 of these is a guaranteed buyer, the other isn't................can you tell the difference?

It's very important that agent's representing sellers in Short Sales educate their Seller that its important to read the "pre-approval letter" and be smart on which exact offer they take.

That Troublesome Contract! ….part two For part one of this “mini-series” please see: http://reopro.ning.com/profiles/blogs/that-troublesome-contract…

Prequalification is the first step in the process and can usually be done by phone or on the internet without verification, unfortunately this is a trick bag in some cases because of the different factors especially when it comes to someone that is self employed or claims a lot of expenses. One good example is an over the road trucker that on his 1099 or W-2 makes 6 figures and looks great on paper, but looking at the tax returns he has claimed fuel, hotel and many other expenses that put him back down to $40k per his actual earnings.

Pre-approval is the next stage at the verification comes in, at this time all data from the borrower has been delivered and verified. This approval will be only for the borrower and be for an amount of money that they can borrow.

Third is the commitment. This is where the borrower and the property have been approved, this unfortunately will be in the last days before closing after appraisals have been done and property condition is acceptable to the type of loan the borrower has applied for. Some earnest money deposits have been lost because the buyer cannot get the commitment from the bank before the contract commitment date, this is usually about 20 days into the contract and if the commitment can’t be delivered either party can back out of the contract or go forward with the commitment waived, so bottom line….if the buyer chooses to proceed, the EMD will be lost if the financing falls through.

Best bet is to know the difference between the three stages and if you accept a prequal upon initial contract ask for a pre-approval within 5 days, this is plenty of time to get all the paperwork to the lender to get to the next stage.

And on a side note; don’t allow a loan officer or mtg broker to call a prequal a pre-approval.
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Comments

BJ Witkopf May 25, 2010 at 3:30am

Jesse and I have spoken about financing and he has some of the best pull-through ratios in the business. The reason is because he knows financing is important to moving assets. I am happy to see him make these points in this forum for the benefit of everyone.
I am a lender that focuses on REO and short sale properties. I speak to numerous listing agents weekly and most have the attitude that mortgages are the buyers agents and buyers choice and "do not get involved". They take this verbal approval and end up listing the property 4 weeks later hurting his opportunities for future listings and limiting his income.
Lenders are doing 2 things. First they are doing these basic approvals and throwing in 40 to close 20. Second they are putting in these loans and PRAYING for an exception and making your buyer and you jump through hoops only to fail weeks into the process. All this costs you time and money. THERE ARE GREAT lenders out there, not all are bad. One bad lender can impact all your business.
The key is find a lender that will work for your asset not their checkbook. When I work a loan, I work it as though I have to respond to the asset manager personally. I wont approve someone just to approve them, I will review everything before we go to contract and have underwriters review anything that looks close to close to questionable. I understand the process and work my loans as assets not mortgages. Just like you.
I am more than willing to work with anyone looking for more information. Jesse has one of the best processes I have seen and the more listing agents that follow that model the more success we all have.
Steve Adkins May 25, 2010 at 3:22am

In my blog: http://reopro.ning.com/profiles/blogs/that-troublesome-contract-1 I had a "Approval" letter from the lender. The DAY of closing I find out that the buyer had a 613 credit score. The lender never pulled the credit report for the letter.

That Troublesome Contract! ..... part two

That Troublesome Contract! ….part two For part one of this “mini-series” please see: http://reopro.ning.com/profiles/blogs/that-troublesome-contract…
Jan Baron, RDCPro, CSP, BPOR May 24, 2010 at 3:43pm

My pet peeve...loan officers who say they pre-approved a buyer by "asking him a few questions" That is NOT a pre-approval. Whenever possible, I try to get my buyers qualified with a proven lender I work with who gets all the documents up front before she commits to that pre-approval. Tony, I have had clients who have their own business, making big bucks, but after all the write offs they net about $10,000...not enough to qualify for a loan.
Tony Linton May 24, 2010 at 5:01am

Prequalification is the first step in the process and can usually be done by phone or on the internet without verification, unfortunately this is a trick bag in some cases because of the different factors especially when it comes to someone that is self employed or claims a lot of expenses. One good example is an over the road trucker that on his 1099 or W-2 makes 6 figures and looks great on paper, but looking at the tax returns he has claimed fuel, hotel and many other expenses that put him back down to $40k per his actual earnings.

Pre-approval is the next stage at the verification comes in, at this time all data from the borrower has been delivered and verified. This approval will be only for the borrower and be for an amount of money that they can borrow.

Third is the commitment. This is where the borrower and the property have been approved, this unfortunately will be in the last days before closing after appraisals have been done and property condition is acceptable to the type of loan the borrower has applied for. Some earnest money deposits have been lost because the buyer cannot get the commitment from the bank before the contract commitment date, this is usually about 20 days into the contract and if the commitment can’t be delivered either party can back out of the contract or go forward with the commitment waived, so bottom line….if the buyer chooses to proceed, the EMD will be lost if the financing falls through.

Best bet is to know the difference between the three stages and if you accept a prequal upon initial contract ask for a pre-approval within 5 days, this is plenty of time to get all the paperwork to the lender to get to the next stage.

And on a side note; don’t allow a loan officer or mtg broker to call a prequal a pre-approval.
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Steve Adkins May 23, 2010 at 3:55pm

Letter #2 is what we use to call "Pre-Qualification" letter, meaning the buyer has not submitted any financial or tax records. Letter #1 has, and the underwritter is already working the loan. And #1 is the one you want!

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