My client IS pre-approved...or NOT

Most agents declare "My client IS pre-approved." .........or NOT, is my assessment.

Many agents are under the misguided notion that the consumer in their car looking for properties or putting in an offer on their listing is pre-approved and qualified for the financing needed for the purchase of a given property. Sadly, even the prospective borrowers often operate under the illusion that they are completely qualified for the loan product or loan amount listed on the "pre-approval" letter given to them by their trusted mortgage consultant.

Most people in real estate sales and mortgage financing can deftly differentiate between a "pre-qualification" and a "pre-approval". A quick review of the comment threads on any of the online comment threads, will however, reveal the fallacy of the predominant thought process.

The common definition would explain a "pre-qualification" as a cursory evaluation of stated income, employment and credit (with the supporting documentation or verification) by a mortgage consultant or real estate agent. As they say, a "pre-qualification" and $5.00 will get you a cup of coffee...it may, or not, get you mortgage financing.

Conversely, a "pre-approval" is, purportedly, based upon a thorough analysis of income and asset documentation, employment assessment and review and access to current credit reports. The pre-approval may, or may not, include completing a mortgage application and submitting the loan package through AUS (automated underwriting systems), such as FannieMae's Desktop Underwriter (DU) or Desktop Originator (DO), or FreddieMac's Loan Prospector (LP).

The issue at hand is the above referenced "pre-approval" is really nothing more that a "glorified pre-qualification". The fact is, that no loan application is "pre-approved" until it has the stamp of approval by a underwriter of the company presenting the loan commitment, subject to further verification (verbal employment, for example) and/or appraisal of property and clear title.

Prior to the "seal of approval" of the lender's underwriter, the AUS findings are nothing more than an opinion of fact. In short, the opinion of the mortgage consultant/processor manipulating the AUS systems.

Most agents and consumers would be surprised at the ease of which automated underwriting can be manipulated to achieve the desired goal of approval. If it doesn't work at $3,500 of income, just make it $3,800....

But, seriously, most mortgage consultant's have little interest, or desire, in falsifying income or assets on AUS findings. The real challenge is that the mortgage consultant may not know what income is accepted and that which is not. Will the lender/investor/underwriter accept a year to date average, or will a two year history be required? Did the mortgage consultant property evaluate the tax returns and remove the "unreimbursed employee expenses" from the allowable income prior to running the AUS?

Evaluation of income is easily the most easily misunderstood aspect of mortgage lending. Ironically, income figures can vary from underwriter to underwriter; so, seriously, how "spot on" can a mortgage consultant realty be?

The point of this post is to finally address one of the many Blue Elephant's sitting in the room: Do your client's have a "pre-qualification" or a "pre-approval"? If is the latter, ask to see the underwriter's condition list and/or loan commitment. AUS findings are only as good as the knowledge and experience of the person at the computer keyboard...and worth about the cost of the paper. There is NO lender commitment is the running of an automated underwriting system.

FACT: The vast majority of lenders will not involve their underwriting staff's time and efforts in the evaluations of "to be determined" properties. Sign a contract and they will fully underwrite the loan. SO, that first time buyer in your car? Chances are that piece of "pre-approval" paper and $5.00 will get you a cup of coffee.

FOR THE RECORD: I DO NO "PRE-QUALIFICATIONS", EVERY FILE HAS COMPLETE UNDERWRITING APPROVAL PRIOR TO ISSUANCE OF A "PRE-APPROVAL" LETTER.