For decades lenders have been shouting to the rooftops that buyers should “Pre-Qualify BEFORE You Buy!” Admittedly, we were trying to get access to prospects as early as we could to, hopefully, bond with them and eliminate our competition. Today though, a Pre-Approval has become the cornerstone of most real estate transactions.
You see, by some estimates, as many as 30% of all deals are falling apart AFTER the contracts are signed. After months of lowering prices and hard negotiations, there is a “meeting of the minds” between a buyer and a seller. It is a long and arduous process. Then nearly one out of three transactions dies. While some “deaths” are unavoidable (because of appraisal or title issues), many could have been avoided by working with a loan officer who takes the time to put clients through the three tests of a valid Pre-Approval:
What is the TRUE income?
Often a prospect will say their income is $70,000. The LO issues a Pre-Approval based on that representation. Practically every mortgage requires an executed IRS 4506 Form (which allows your lender to verify your income directly with what you file with the IRS). Believe it or not, but many people (even salaried W2 people) take write offs, like Unreimbursed Expenses, that underwriters will deduct from income earned. That would lower their $70,000 income and affect the amount our prospect would qualify for. Additionally, often, there are challenges with overtime and bonuses. The bottom line is, if your LO did not review your actual tax returns (like the underwriter will), the Pre-Approval is almost worthless.
When was the credit run?
Most lenders will need to re-run credit after 90 days. The credit scoring models are extremely sensitive. If a score moves just 10 points lower, I have seen approved loans quickly become denied loans. I have also seen situations where a change in credit score requires a change in pricing (sometimes causing a higher rate and sometimes requiring additional points to be charged). In either case, these changes can put deals in jeopardy. Being aware of the time frame you have to close BEFORE needing to update a credit score is important and should be taken into consideration.
Where are the assets?
Often when pre-qualifying a borrower, a loan officer will ask how much cash they have to close. Once the file is actually put into processing, we have to deal with sourcing large deposits, gift monies, withdrawals from retirement accounts, sometimes “cash” deposits, or sales of personal property. Lenders want to know where your money is coming from. Your loan officer should be reviewing your bank statements and such before issuing the Pre-Approval.
Gone are the days of “take in the loan and we’ll figure it out”. Underwriting guidelines make that impossible. I have always taught people that lenders look for four things- income, assets, credit and appraisal…..and three of the four should be analyzed, really analyzed, before issuing a Pre-Approval to help ensure that we close the highest possible percentage of applications taken. Gone are the days of just giving a Pre-Approval….it is the obligation of the LO to issue real Approvals, subject to appraisals and title reports.
If you have any questions, please feel free to contact us at either: