The first step for home buyers is to meet with a lender. The purpose of meeting with a lender is to find out how much money can be borrowed to purchase a home, and to receive that all important pre-approval letter.
Most of us will not let our sellers entertain any offers that are not accompanied by a pre-approval letter. When I get a letter from a lender with an offer on one of my listings, I call the lender and ask some questions. If I have never heard of the mortgage company I send an email to my colleagues and ask if anyone has ever worked with the lender.
Pre-approval letters are always conditional with no guarantees. For example if the borrowers credit rating or income should change the pre-approval letter can be withdrawn. When a lender writes a pre-approval letter he or she has checked the borrowers credit score and has reviewed income tax statements for the last two years.
A few weeks ago I got a pre-approval letter and an offer on one of my listings. It came from a large mortgage company that I have done business with before. I called the lender and he said the buyer could pay for the home. My sellers, accepted the offer and went on to write an offer on another home. The sellers of that home found a home that they wanted to write an offer on.
Two weeks before the closing I called the lender who wrote the pre-approval letter to check up on the appraisal. Lenders always appraise homes before writing a loan. The lender told me that he was not sure if the buyer could actually buy the home. This was news to me. Having a lender say that he is not sure two weeks before a closing is not acceptable. The answer needs to be yes, or no. He did not alert me to any problem, neither did the agent who represented the buyer.
If I had not checked on it, as I always do, I am wondering when he would have let me know that there was a problem. The good lenders let us know if there is a problem. Good buyers agents also follow up to make sure their buyer will get final approval on time. I called the other agent and we sent the buyer to one of the best lenders in the twin cities. He always gives a yes or no answer and understands that there are no maybes in a situation like this. That lender told me that the buyer could not buy the home, not even close.
For those of us who work in real estate getting a pre-approval letter from a large lender that is not any good is very disturbing. It is always possible for financing to fall through but to get a letter that says someone is qualified to buy a home, when they are not, is a serious problem.
The buyer got her earnest money back and will have to wait a year or so to purchase a home. The sellers had to cancel the offer on their dream home and put the home they own now back on the market.
It will be hard for me to look at pre-approval letters in the same way.
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That is killer… did the lender give any explanation why the pre-approval was written in first place? Was it a matter of the buyer being stupid and screwing up their credit after the pre-approval or was it something that should have been caught at the beginning.
If it is the former, things happen. If it is the latter, I’d be calling up the management chain to figure out who’s head should role.
management chain has been contacted. There were several problems.
Is there any way to really protect yourself from this? Other then not trusting pre-approvals from the same mortgage broker again. Seems like you are going to get burnt once first before you will ever know. Also with the rules changing all the time I have even seen people get pre-approvals and then not be able to get the loan because the rules changed in the 3 weeks it took for them to get the mortgage.
Amen to this sister! I also agree with Greg–for buyers on the cusp of approval, any slight change in rules can change everything and leave everyone in heartache.
Makes you wonder how tighter the controls on lenders need to be. Or, in this case, as you infer, perhaps the mistake is ours. In other words, what value is there in the LL? Should we have to “interpret” what the lender is conveying? Or, could it simply inform us that they have a good or bad, of “iffy” credit rating, and qualify for all, most, or few loan alternatives. Doesn’t seem difficult, but maybe simplicity is not the intent.
Glad to hear you double checked, it certainly beats getting the call the day before closing!
Sorry to hear that happened but it made for an excellent post. As a loan officer, this was especially challenging to read!
We should also be talking about the buyer who couldn’t actually afford to buy that house – what is the thought process that allows the buyer to think they can afford a house they cannot? As a buyer, I understand thinking that you can afford something slightly higher than you can, but to think you can afford an entire house that you cannot? People like this – buyer and mortgage guy – are the beginning of the subprime crisis.
MP – I would like to comment on that. I know people who want homes so badly they will do most anything. I would imagine they would be easy prey for mortgage fraud. They may beleive that one day they can afford the home. they take huge risks.
Great Post! Here in South Florida, we see this a lot as of late! When I receive an offer on one of my listings, I first speak with the buyer’s lender to “feel him out” and ask him/her as many questions I can think of in order if I truly believe that the buyer(s) can really afford the home. Pre-Qualification & Preapproval are two totally different pieces of paper. Pre-Quals are merely pieces of paper with verbal information that cannot be reliable just on paper. ALL agents need to almost cross examine the lenders. In your case Teresa, at least you tightened the loan commitment period that you had 2 weeks before the closing date to know that the buyers were unable to receive financing.
Well in this case it sounds like the buyers shouldn’t have been able to get the pre-approval letter.
How much can the mortgage broker actually tell the seller’s agent to put them at ease in the current climates? Can they tell them if it’s an FHA loan or not? What can they say about their credit, other than it’s “good” or “excellant”?
Nate Great questions. The pre-approval letters are pretty generic. We always know what kind of financing a buyer is using by looking at the purchase agreement. They can’t really say anything about credit scores but will comment that the buyer is excellent.
Questions: How far can we go in questioning the buyer’s mortgage lender regarding the buyer’s financing? I try to learn as much about the buyer as possible from the lender to see if he/she is qualified to purchase the said property. Realtors must be perceptive during this novice stage in the purchase process in order to rectify any potential problems from the get-go. Any suggestions?
Michael – I have never had any problem with my own buyers. Not very scientific but I operate on instinct and make sure they are with a good lender. The letter I got was for the buyer of one of my listings and she as represented by a new agent.
Hey Teresa! Thanks for the response. I know that we are not getting into the car and showing dozens upon dozens of properties to potential buyers without a pre-approval letter and a long conversation with the client’s lender. My concern is when you are on the other side of the deal representing the seller and an offer comes through your eFax. How personal can we get in questioning the quality of the buyer’s financing power? Both the selling agent and mortgage broker will of course want to say, “Don’t worry. The buyer is good to go on this deal.” Of course, we know that getting an offer on one of our listings is only half the battle. The other half is just as, if not more, important. I try to ascertain as much persona information as possible from the buyer’s lender in order to truly know if they can afford the property. I ask a lot of yes/no questions to the lender, such as: Have you confirmed that the buyer has enough funds in their bank account for closing costs and mortgage down payment? Have they filled out all of the necessary financing paperwork and provided W2′s, etc. These are just to name a few. Any thoughts?
Michael, on Minnesota contracts there is a box on the addendum that can be checked for a full financial disclosure from the buyer. I have not used that option but think I will in the future. Lenders can only tell us what their clients give them permission to tell us.
If full financial disclosure means what I think it does, I’d be concerned as a potential buyer having to provide all that information during the negotiation over price.
If you were buying a place significantly under your potential lending ability (say 1.5-2 times your income instead of 3 times), sellers may be more reluctant to negotiate or lower the price. A kind of “well they can easily afford to pay full price, so why shouldn’t they” reaction.
Though I definitely see how it would help the sellers agent weed out unsuitable offers.
Thank you