Mortgage Pre-Approval Letters: The good, the bad and the ugly
Mortgage pre-approval letters seem to be a little talked-about topic in the real estate market. As you may already know, we are still in an era where mortgage financing is sometimes problematic. As such, sellers and listing agents have increased their scrutiny of buyers, mortgage brokers and their documentation. This is where a mortgage pre-approval letter becomes really important. I cannot stress this enough. A fully-documented “pre-approval” letter from Wells Fargo is much stronger than a “pre-qualified” letter from a mortgage broker no one has ever heard of. A letter which has wording to the effect: “subject to review of a credit application and buyer’s financial documents” tells the listing agent you have not submitted anything to get pre-approved and therefore your approval letter is almost worthless.
No matter how creditworthy, all buyers should get as far down the loan approval path as possible before making an offer. Some lenders are willing to go as far as full underwriting review of all documentation prior to even identifying a home. As you can imagine, having this type of approval letter gives the buyer, seller and listing agent a greater sense of confidence. No lenders advertise this type of review as it requires a lot of work on their part for what is a very uncertain outcome (in light of the fact that the buyer doesn’t even have a home identified yet). Talk to your lender and see how far they will go. Remember, the squeaky wheel gets the grease.
Can a Second Pre-Approval Letter Improve Your Chances in a Multiple Offer Situation?
All real estate agents have a loan broker they like, trust and refer business to. A buyer who gets pre-approved with the listing agent’s preferred lender will have a small leg up on the competition. The goal is to get the listing agent’s preferred loan broker to tell the listing agent your financial documents look great and that you should have no problem getting a loan. This is a powerful recommendation from a trusted source. These loan brokers are more than happy to run your information through their system and give you a quote and some sort of pre-approval letter as they are hoping to earn your business.
Whatever your current pre-approval situation, you can only benefit from seeking a secondary or backup pre-approval letter from the listing agent’s preferred lender. It never costs anything to get pre-approved and you are never obligated to use the listing agent’s lender once approved. The listing agent will feel good that you are willing to go the extra mile and happy they were able to refer someone to their friend/loan broker.
Since you have already assembled all of your financial documentation (including your credit reports) to give to your first choice lender, it should be a very simple matter to email this information to the listing agent’s loan broker.
Which Type of Lender Should You Choose?
For most people, the purchase of a home is the largest investment they will make in their lifetime. Therefore, putting some thought into selecting a mortgage company should be a top priority.
There are three basic types of mortgage lenders in the banking industry. Below I have outlined some of the pros and cons of each type. This should help point you in the right direction in making the best selection for your home purchase.
- Direct/Wholesale Lenders. Direct lenders fund loans for major banks, such as Bank of America, GMAC, U.S. Bank, etc, but they do so from satellite offices. These major banks have given these satellite offices the “right” to underwrite and fund loans in the name of the bank.
The interest rates from a direct lender can sometimes be lower than from a bank branch because a loan from a bank branch includes padded costs and rates needed to keep the actual bank branch open.
Direct or “wholesale” lenders are often the lowest-priced option for buyers. Plus, wholesale lenders are willing to have their underwriting departments review your application and documentation PRIOR to actually having a specific home in mind. Call your current loan broker and see if he or she can give you that same level of approval and confidence. Once your application has been reviewed, approved and a condition list has been generated, you will have a much higher level of confidence your loan will sail right through without any hiccups. This level of approval can give you the confidence to write your offer with a very short loan contingency or perhaps no loan contingency at all. As I have discussed in my document titled “How-to-create-a-winning-offer-package” a short or non-existent loan contingency is one of the cornerstones of a strong offer, particularly in a multiple offer situation.
Finally, direct lenders are faster than the other two options because the actual loan file is underwritten in the satellite office, rather than being shipped off to an operation center like a bank branch or broker would do. This faster processing time can give you the confidence to offer a shorter close of escrow.
- Bank Branch/Retail Loan Officers. The only real benefit of getting a loan from your local bank branch is convenience. You can walk into your local branch and apply for a mortgage.
However, the problem with this path is that your loan package will get shipped off to a regional or national operation center and placed in the back of the queue. This process can sometimes take 30-45 days from start to finish. In other words, the loan officer at your local bank branch is nothing more than an order taker. Bank branch loan officers are usually new in the business and lack the skill and knowledge of a veteran loan officer.
In addition to the slower processing times, interest rates at bank branches are higher than with wholesale lenders. Why put your hard earned money into the pocket of a large corporation when you can get a discounted rate somewhere else?
Why wait 30-45 days to get your loan approved and funded when you can get the same loan processed in 2-3 weeks at a lower rate with a wholesale lender?
- Brokers. Brokers are usually as highly-skilled as a direct lender, but have not earned the ability to approve and fund loans directly. A broker will take a loan application and ship the loan off to the bank of their choice. This goes into the same queue as a bank branch loan and often takes 30 or more days to process.
The interest rates offered by brokers are usually very competitive, but the broker will have to add on additional fees for underwriting since they are not underwriting and processing the loan at their actual office. In some cases, the rates are padded quite a bit, depending on the relationship the broker has with the bank they are working with.
Borrowers with good credit, good income and healthy assets are often best suited to work with a direct lender. By doing so, they will be rewarded with lower interest rates and a faster processing time from start to finish which in turn makes them more competitive buyers.
Returning to the original intent of this document, I have included some examples of various lender letters. As you will see not all letters are created the same. Some are good, some are bad and some are downright ugly!
My scathing review of these letters does not mean all letters from any particular bank will be useless. It really boils down to the person writing up the letter and how far buyers got in the loan approval process. With the knowledge you gain from this document you will be able to extract a much better pre-approval letter from your loan person even if that person works in a branch office of a large bank like Wells Fargo, BofA or Chase.