Why Morgage Loan PreApprovals May Not Be A Sure Thing

At our office meeting today, one of the agents sold his listing, got bank approvals but then announced he was looking for back-up because he did not feel the buyer was going to perform. So my questions – if the buyer was pre-approved prior to making the offer – why back out now. The key component is that maybe the buyer was not pre-approved. There is a difference between pre-approval and pre-qualify, and neither one is a sure thing until final approval by the underwriter.

Pre-qualifying a buyer is taking their word as to income, expenses and possibly credit ratings. Pre-approval is verifying what the buyer claims about their ability to purchase a home is indeed fact. Two different things.

A preapproval letter may be expressed in terms of a maximum monthly mortgage payment, a maximum loan amount, and/or a maximum ratio of loan to value. If a mortgage payment is shown, the interest rate used to calculate it may be shown, but the rate used is not guaranteed and won’t be until the borrower submits a complete application and the rate is locked.

If a maximum loan is specified, it will be contingent upon an appraisal of some minimum amount. The preapproval also will be dependent upon verification of information provided by the borrower and underwriting approval of the transaction. Check the date on the pre-approval letter.  If interest rates have increased the buyer may no longer qualify for the higher mortgage payment.

A mortgage preapproval is stronger than a prequalification because preapproval includes an assessment of the borrower’s credit, but prequalification does not. A preapproval is weaker than an approval, however, because the property value is preliminary and the mortgage rate is not known.

In addition, lenders may not take the same care in verifying the borrower’s income or assets for a pre-approval as they would for an approval. Also, pre-approvals do not take into consideration the any conditions the underwriter may impose on the borrower. While some loans look good on the surface and the buyer is strong, I have seen many a buyer not get final loan approval.

Lenders are never obligated to make a loan that does not meet their conditions. Conditions have become much tougher than they had been, and especially so for self-employed borrowers, who now must run a gauntlet of rules and checks.

The bottom line for home sellers is that the reliability of preapprovals is not what they once were, especially for self-employed borrowers. While I always have my clients get preapproved prior to making an offer, we never know the final outcome until the buyer is in for final approval.

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