George Souto has written what I consider to be a really important post dispelling the myth about the demise of the pre-approval letter.
Buyers and their agents need to know that the pre-approval letter is alive and kicking!
What's even better is that Geoge shows us where the confusion came from and how we can advise clients who may be incorrectly advised that they can't get a pre-approval letter.
Lenn Harley wrote a blog on Sunday in which she rightfully questioned the accuracy of what was being stated on another blog about Pre-Approval Letter. The writer of the blog that Lenn was questioning, stated that her Loan Officer had informed her that he would no longer be able to provide her with a Pre-Approval Letter for her Buyers because of restrictions imposed by RESPA. This information was incorrect, Pre-Approval Letters are very much alive and well. But before I go any further let me give three very quick definitions of what I consider a Pre-Qualification Letter, Pre-Approval Letter, and a Loan Commitment Letter. Keep in mind that these are MY definitions, and MY opinion.
- 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 DU 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 accentual 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.
Again these are MY definitions, other Loan Officers will have their own, including equating a Pre-Qualification Letter to a Pre-Approval Letter, because that is what they do for their Pre-Qualification Letters. You need to find out what your Loan Officer means when he or she uses those terms.
Having said all that, why would a Loan Officer make a statement like the one made in the blog mentioned above? The reason is that if a Loan Officer takes six pieces of information from a Borrower, RSPA requires him to then issue a Good Faith Estimate (GFE), because those six things constitute an Application in the eyes of RSPA, and they HAVE TO issue a GFE within 3 business days or be in violation. The six things are:
- Borrowers Name
- Social Security Number
- Income
- Property Address
- Estimate of Value of Property
- Loan Amount
So why would issuing a GFE present a problem? The problem is that with the new GFE that went into affect at the beginning of the year (which has its own problems, but that is another blog) the Lender is locked in to some of the figures (Lender Fees) for 10 days, and for some of the Fees they only have a 10% flexibility. Lenders are hesitant about being put in that position, especially since there is no property yet, and the Borrowers Credit Scores could change by the time a property is found, which might require Points to be charged.
If a Lender does not want to issue a Pre-Approval Letter, because they don't want to run the risk of having to issue a GFE and be locked into those fees, then they should be upfront and just say so, and not create a Myth that RSPA does not allow them to do so.
The other reason why a Loan Officer might say something like that is because they want to play with the Fees. Use a low figure to get a Borrower to go with him or her, and then tack on higher Fees and Points once the Borrower is ready to put a loan into process. Most of those games have gone away, but they do still exist.
If your Loan Officer will not give you a Pre-Approval or Pre-Qualification Letter for a Borrower, or if you are one of those who feel that a Pre-Approval Letter or Pre-Qualification Letter is worthless, then you need to find another Loan Officer, who will produce one that you can trust.
Most of my business comes from referrals from Realtors, so I am very careful about what I issue. When I issue a Pre-Approval Letter it is worth FAR MORE than the paper it is written on, and the only way that Borrower will not be approved for a loan, is because something that could not be foreseen at the time of application, later pops up.
Get your Buyers Pre-Approved by a trusted Loan Officer as early in the process as possible, and DO NOT accept the Myth that you cannot be given one!!!
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Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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Thank you for reposting this. I was surprised when I read the no-more-pre-approval post, but wondered about the validity. I'm glad someone found the time to do due diligence.
This poster has his own definitions? I'm not sure you get to have your own definitions in this business. The laws changed January 1 and provide common definitions for terminology. The pre-approval this guy has described hits at least 3 triggers to require a GFE, which requires a property address, a contract, disclosures and an appraisal.
A reasonable middle ground is the pre-qualification from a highly reputable lender and loan officer that includes credit, income and asset verification.
I just dropped a mortgage banker of many years association who was marketing that he could do pre-approvals with automated underwriting (underwriting was in-house) while mortgage brokers could only do pre-qualifications.
Sorry, Denise, I feel strongly about this.
Hi Leslie ~ I think he's trying to cover himself by calling them his own definitions. From where I'm sitting these definitions are what I understand them to mean too.
You're right about the triggers for the GFE too with the pre-approval. That's why this whole debate came up about not being able to get a pre-approval. Nowhere in there though do I see that he's against that. He's merely pointing out that that's why some lenders may shy away from giving a pre-approval because of the GFE issue.
I'm not a lender so I don't know how this GFE issue will play out. I'm hoping customers will continue to get a GFE when they are pre-approved. At the end of the day why should the costs change at short notice anyway?
I think you might have gotten caught up in the semantics of this post rather than the essence of what he's saying. And even if that's not the case I doubt whether we're always going to be of the same opinion anyway!
On a related topic. I am considering dropping a mortgage banker as I write this too. Your comments struck a tone with me as I realize, once again, that they are definitely not all created equal - I had another example of that today!
Denise