For over 22 years now I have been pre-approving prospective buyers for their new home. During that time I have seen a lot of strange things. Still today I am continually surprise by one thing: bad mortgage pre-approvals.
This problem never seems to go away, no matter what our beloved mortgage industry is going through. What am I talking about? I’m talking about how many loan originators provide incomplete, inaccurate and utterly wrong pre-approvals.
How do I know this? Good question! It’s because so many of my current and past clients have come to me after relying on someone else’s pre-approval and found out the hard way—their loan did not close.
First, let’s be straight as to why it’s so important. An inaccurate or poorly done pre-approval creates inaccurate (wrong) assumptions about what you think you can afford. This produces two very bad outcomes:
You can’t buy your new home because you don’t qualify
How did this happen? You worked with your Realtor and got a home under contract based on what you thought you qualified for—vis-a-vis “the pre-approval.” You spent money on inspections, attorneys, appraisals, not to mention the costly time you and your Realtor invested, and, just before you are supposed to close on your new home, the lender tells you that you are unable to buy your new home because you do not qualify! In most cases, this happens because the loan originator didn’t take the time to properly pre-approve you.
You are pre-approved for less than you can afford
This second bad outcome, although not as bad, you may never even know happened to you. In this case you were pre-approved for less than you could afford, meaning you could have purchased a larger home that was in a better neighborhood, closer to work or school, had a better view, or any other feature that you may have wanted and could not have afforded—or so you thought. These “under” pre-approvals cost more in the long run, too, and often times you miss out on future potential that you deserve now based on your current financial abilities. If done properly, you should know what all of your options are; like if you could qualify to buy an investment property to hold for rent, etc.
Getting a good pre-approval is not difficult if you know what to look for! Use my Pre-Approval Checklist below to pinpoint the signs that your pre-approval is “good” or “bad.”
Checklist to Spot a “BAD” Pre-Approval
- Credit report: If you are not provided a copy of the report and/or you are told they are not allowed to provide you with a copy, or if you do get a copy, it is not complete, does not contain credit scores or only contains information from one credit bureau, my advice is to run from this lender! One more thought on credit reports – a good lender should be able to tell you what simple things you can do to improve your credit scores.
- Documentation: If you are not asked to provide detailed information supporting your income, assets and debts, this is a huge signal something is wrong. This is like asking a doctor to diagnose your illness without doing a physical exam and running tests. My advice is to expect similar results. Documentation is the key to a successful mortgage loan pre-approval.
- The Interview: Quality time, quality time, quality time. We all know that good, effective communication requires quality time. If you spend less time talking with your lender than you do when you order your coffee, you are headed for trouble. There is a lot to discuss, so expect to spend up to an hour, perhaps spread over a few calls, speaking with your lender during the pre-approval process.
- The Mortgage Loan Pre-Approval Letter: I’ve seen some letters hand written, containing one sentence and, perhaps the worst, a letter that didn’t include the loan amount or payment of the approval! Let’s be certain, these are not pre-approvals, and for the most part, are a waste of paper. Once again, stay clear of any lender that does not provide detail as to what you are pre-approved for, complete with limitations and conditions.
It’s a process – The mortgage loan pre-approval process is probably the most significant part of the entire process, and, if done properly, will help to ensure that the entire loan process runs smoothly and without surprises.
My advice: find someone who will spend the time with you and do it right. I’ll talk about how to spot a “good” pre-approval in a later post.
Happy house hunting!