If you’re shopping for a new home, one of the first things your realtor will tell you is that you need to get pre-approved. Your realtor will want you to be pre-approved and so will the seller. As a buyer, pre-approval makes sense because you’ll want to know what your buying power is, what your cost will be and your potential payments. And, of course, sellers want proof that you can get the necessary mortgage. Mortgage people like it, too, because they see it as the first step with new buyers. The net/net is that everybody thinks pre-approval is a good idea.
So what’s the problem?
The biggest problem with pre-approvals is that they are not etched in stone. Pre-approvals are not reviewed or processed by the people who do underwriting and are not subject only to an appraisal though most of them say they are. However, they are part and parcel of almost every real estate deal and have become vital, especially if there is bidding on the house.
Back in the day
Mortgage pre-qualification used to be done by real estate agents. They required no credit checks and monthly payments were determined by interest rate factors. There were things called qualifying ratios that were used to determine buying power and banks simply filled in forms as to what buyers could afford. That was the process. There were no mortgage representatives involved.
Pre-qualification has changed
Back in the early 2000s, mortgage pre-qualification moved from real estate agents to mortgage representatives leaving real estate agents to focus on their job of selling houses. Mortgage representatives seized the opportunity to fill this role.
Mortgage reps are really salespeople
A mortgage rep’s business card might say something like Loan Officer but they often had few financial skills and little or no training. Being a Loan Officer became something that could be learned on the job. Not every mortgage representative or Loan Officer did credit checks and in some cases the process was no more than a telephone conversation and a few simple mortgage calculations. In short, pre-approval became a very low priority function and the quality of the finished product suffered accordingly.
Even more suspect
The rise of Mortgage Backed Securities (MBS) created an almost limitless selection of mortgage products and created a market where just everybody got approved. There were so many different products available that Loan Officers could find one that would ensure pre-approval regardless of the buyer’s profile. Pre-approval became basically automatic regardless of the borrower’s profile.
What it’s like today
Today, prospective homebuyers submit employment, income and assets mostly via a telephone interview. The mortgage rep will get a credit report and then an algorithm automatically delivers an underwriting decision. That’s the entire process. Loan officers originate and source mortgage loans and then underwriters give their final approval. There are many underwriting guidelines these days, and it’s up to the mortgage rep to interpret them and to anticipate obstacles to approval before signing off on the deal. Many of these people feel pressured to sign the pre-approval letter because everyone’s counting on it.
As good as it gets
While, pre-approval is not the ironclad guarantee it used to be, it’s the only game in town. It may not be a total con job, but both buyers and sellers need to hope that the pre-approval process was done carefully and that the buyer will be able to qualify for the mortgage necessary to close the deal. No one will be happy if it turns out the pre-approval letter wasn’t worth the paper it was written on and the sale collapses.