`Pre-approval, pre-qualification' for loan doesn't mean done deal

Nation's Housing

May 23, 2004|By KENNETH HARNEY

DID MORTGAGE hassles cause the rescheduling - or even cancellation - of the closing on your home purchase?

Did the lender not quite get everything together because of "processing" or underwriting delays? Were there appraisal problems? Or unexpected complications related to the seemingly rock-solid "pre-approval" or "pre-qualification" letters the mortgage broker or lender provided to help you shop for a home?

If your answer is yes, a new study suggests, you've got a lot of company.

One in eight home-purchase closings gets knocked off track by mortgage-related issues, according to a survey by market research firm Campbell Communications of Washington. An additional 3 percent get scuttled altogether.

The study, which covered a national sample of 1,400 real estate agents and brokers, was commissioned by Inside Mortgage Finance, a lending industry publication.

Among the problems that appear to be getting worse are widespread misunderstandings among homebuyers, lenders and realty professionals about the real meanings of pre-approval and pre-qualification letters. According to the realty agents interviewed for the study, one in 10 pre-approval letters turns out to be "invalid." That is, when the homebuyers apply for a mortgage based on the pre-approval letter, the mortgage lender or broker cannot deliver what the letter appeared to promise.

From the perspectives of realty agents and homebuyers, this can amount to a deal-busting disaster because the buyers might have negotiated the purchase price of the property based on the belief that they had credit up to a certain amount.

Mortgage brokers and lenders have a sharply contrasting view of the matter. They say realty agents and homebuyers often fail to read the text of pre-qualification and pre-approval letters. Both types of letters typically hedge their promises in ways that nobody should ignore.

To avoid getting derailed next time around, here's a quick primer on what you need to know about pre-approvals and pre-qualifications.

For starters, there is a big difference between the two. Pre-qualification simply means that somebody - a mortgage broker or a loan officer - has looked at the financial information you submitted and concluded that you might be eligible for a predefined maximum home price and loan amount.

The key point to remember about most pre-qualification letters is that they represent nothing more than a preliminary assessment of your financial picture and creditworthiness. Steve Galante, a loan officer for Broomfield, Colo.-based Myriad Financial LLC, says pre-qualification letters may not be "worth the paper they're written on. They are definitely not a commitment to make a mortgage."

Pre-approval letters have more solid grounding but are still carefully hedged. For mortgage brokers, a pre-approval usually means that the broker has taken your key information and run it through some form of underwriting system to arrive at a sales price and loan amount range for which you appear to be eligible.

The underwriting systems used can be Fannie Mae's or Freddie Mac's popular online services, or a lender's proprietary evaluation program. Pre-approval, in other words, takes you a big step beyond mere pre-qualification. But it's still not a mortgage commitment.

Here's how Myriad Financial words its standard pre-approval letter. First, it reports to the buyers that, having run their information through an underwriting program, "your financial profile meets [Fannie's or Freddie's or a lender's] guidelines and you are eligible for financing" in the amount and terms stated in the letter.

Then it warns the homebuyers that "any new accounts you open, credit charges incurred or credit inquiries entered on your credit report subsequent to the date of [the letter]" may change the whole ballgame - the "qualifying price range and the interest rate you have been quoted."

The letter adds a final caveat: "Please note that your loan will need to be officially underwritten and given official approval before funding of the property may take place."

What can get in the way of - and delay or significantly change - a loan deal quoted in a pre-approval letter? Most mortgage brokers and lenders can supply a long list of underwriting nightmares, from credit reports that turn out to be not as squeaky-clean as expected, to car-payment or mortgage defaults made after the pre-approval letter was issued. Or bank deposits declared for pre-approval purposes that turn out to have been gifts, not eligible for inclusion under the lender's underwriting rules.

Pre-qualification and pre-approval letters might be reassuring to have in your pocket as you shop for a home and even impressive to home sellers. But read the not-so-fine print: If your appraisal comes in low, your credit scores hit the skids or your income and assets don't pan out, the mortgage you are "pre-approved" for might not be the one you're likely to get.

Ken Harney's e-mail address is kharney@winstarmail.com.

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