What to Look For in a Pre-Approval

Transcription

1 What to Look For in a Pre-Approval Authored by Keith Bergfeld, Network Funding, LP And the ongoing focus group dedicated to improving the efficiency of real estate transactions. Alan Anderson First American Title Insurance Co. Steve Burkhardt F.C. Tucker Company Debbie Fairfax Metropolitan Indianapolis Board of REALTORS Richelle Cohen Mossler, Esq. Indiana Association of REALTORS Kellie Stanley First American Title Insurance Co. Bob Waddey First Republic Mortgage Corp.

2 Overview The vast majority of real estate transactions involve a mortgage. In recent years the mortgage process has become more and more complex and unpredictable. Loan approval really involves three major steps: 1. Pre-qualification: this means the buyer s credit has been reviewed and based on their stated income and assets they are pre-qualified to purchase up to a certain dollar amount. 2. Pre-Approval: this means that the buyer s income and assets have been verified and their application has likely been run through an automated underwriting system. Only conditions related to the property should remain - appraisal, title commitment, homeowner s insurance, etc. 3. Final Approval: this means that all conditions have been met and they are clear to close. The reliability of a Pre-Approval has long been a point of contention in that most are perceived as not being worth the paper they are written on. Selling agents don t want to spend time and money on gas showing homes to buyers who are not qualified. Listing agents need to have a sense the buyer involved in an offer to purchase their client s home can successfully navigate the mortgage process. While no lender can or will guarantee final approval and closing - there are things REALTORS can look for in a Pre-Approval Letter to gain a comfort level that their transaction involves a solid buyer. This paper is intended to provide REALTORS with the information they need to feel confident the buyer is able to close as expected. Are the Lender and Loan Originator Properly Licensed or Registered? All lenders and loan originators must be licensed or registered by the National Mortgage Licensing System (NMLS). Lenders and loan originators are required to show their license or registration numbers on all documents - including Pre-Approval Letters. To verify that a lender or loan originator has a valid license/registration, visit: Credit The Pre-Approval Letter should indicate that the buyer s credit report has been reviewed. Credit reports are good for 90 days - so the letter should indicate an expiration date for the credit report. It should also indicate if automated underwriting findings have been obtained and what the findings are. There are two automated underwriting systems that apply to most transactions - Conventional, FHA, and VA. 2

3 Fannie Mae s system is called Desktop Underwriter or Originator (DU/DO). There are variety of possible recommendations that can be received via DU/DO. The three most common are Approve/Eligible, Refer/Eligible, and Refer with Caution. Freddie Mac s system is called Loan Prospector (LP). The three most common recommendations from LP are Accept, Refer, and Caution. Any recommendation other than Approve/Eligible or Accept will require manual underwriting. USDA loans have their own system called GUS. Some jumbo loans may not be underwritten using automated underwriting. Lenders are now required to pull a Loan Review Report within three days of closing - which can often be after the buyer has received clear to close. This report does not pull new credit scores, but does show changes in balances, new inquiries, and new accounts or loans. Buyers should be cautioned not to apply for new credit or acquire any new debt. This could result in their loan being denied at the last minute or at the very least delay the closing while the file goes back through underwriting. Income The Pre-Approval Letter should indicate that the buyer s income has been verified. Standard documentation for a wage-earner is paycheck stubs, W2s, and verbal verification of employment. If the buyer is self-employed or receives commission - tax returns are required. Loans manually underwritten might require a written verification of employment. Lenders are required to verbally verify employment just prior to closing - so buyers should be cautioned to avoid any change in employment. If the Pre-Approval Letter lists conditions like paycheck stubs, W2s, or tax returns - there should because for concern. Paycheck stubs could reveal things like child support or a 401k or other loan. W2s that show significantly less income than current income could mean a gap in employment. Tax returns (if required) are complicated and may show lower income than stated. Any of these issues could mean you don t really have a solid buyer. Assets The Pre-Approval Letter should indicate that the buyer s assets have been verified. Most findings require a bank statement that shows a previous months balance, covers at least 30 days, and shows an ending balance. Obviously the buyer must have enough money to cover their cash to close and with some loans, a certain amount of reserves. Buyers must explain any large deposits - other than payroll. Gift funds must come from a relative and be carefully documented. Funds typically may not be borrowed. Manual underwriting may require two or more months bank statements and/or a written verification of deposit. If the Pre-Approval list conditions like latest bank statement or down payment from an acceptable source, then it s likely assets have not been verified. Buyers should be cautioned to have solid documentation for any large deposits. 3

4 How Much Are They Pre-Approved For? Obviously the selling agent needs to know this amount before showing homes to buyers. Often times it is in the best interest of the buyer to withhold this information from the listing agent. Let s say they re preapproved for $250,000 and they re looking at a home listed for $200,000 and they want to offer $190,000. In this case the $250,000 Pre-Approval Letter weakens the buyers negotiating position. Lenders will often provide two letters - one that shows the amount to be determined and another that states a maximum dollar amount. The lender should be willing to issue a Pre-Approval Letter that matches the agreed upon price. Conditions A good Pre-Approval Letter should only list conditions that are minor in nature and/or related to the property. Typical conditions for a Pre-Approval are as follows: No material change in credit history or debts No material change in employment or income Acceptable appraisal Flood Certification Acceptable commitment for title insurance with 24 month chain of title Survey (if applicable) Homeowner s insurance - first year premium to be paid at closing Communication All lenders Pre-Approval Letters will have a disclaimer that allow them to deny any loan that they have preapproved. But keep in mind, most originators are only paid for loans that actually close. And good processors, underwriters, and closers understand their jobs depend on closed loans. However, until the loan documents have been signed and the funds have been wired anything can happen. To gain peace of mind, REALTORS should contact the loan originator listed on the Pre-Approval Letter. That conversation - more than any piece of paper - can give agents some confidence about the transaction. Often times the closing date is set for 30 days, but it takes several days to get through all the counters. Ask the loan originator - based on the circumstances of the buyer, the documentation they have, the program they are using, and their internal processes - can they reasonably expect to meet the closing date? Issues are better addressed early on - rather than at the last minute. Communication is the key. No matter how well qualified the buyer is, different circumstances, programs, etc. can impact the process. Ultimately the closing can only happen when the lender has issued a clear to close. It is in the best interest of everyone involved to establish open lines of communication early and fully understand expectations of the process. Armed with some basic knowledge of Pre-Approvals and a general understanding of everything involved, REAL- TORS can help guide their clients through the process much better. 4

5 Pre-Approval Checklist Does the Pre-Approval Letter... Provide the NMLS license/registration number of the lender? Provide the NMLS license/registration number of the loan originator? Provide contact information for the loan originator? Indicate the buyers credit has been reviewed and that the expiration date is well beyond the projected closing date? Indicate that the buyers application has been approved via automated underwriting, such as DU/DO or LP? Indicate the recommendation received from DU/DO or LP? Look for Approve/Eligible or Accept. Have only property related or routine/minor conditions? Have you... Checked to verify that the lender and loan originator are actively licensed/registered? Contacted the loan originator to discuss the Pre-Approval? Determined that - based on the overall circumstances - the closing will occur as scheduled? 5