Fellow Rain City Guide Contributor, Tim Kane wrote an interesting post while I was on vacation asking if preapproval letters are worth their ink in our current market. Truth be told, this was a valid question prior to our current market conditions and has been for years. The true worth of the preapproval letter prior to the mortgage "melt down" was based on the merit of the loan originator who was preparing the letter. I’ve addressed this issue before here and here. Anyone can type a letter or issue a fancy certificate; has the borrower really submitted supporting documents verify their income, employment and assets required per underwriting (i.e. the borrower has been credit underwritten)?
The fact is, in today’s current mortgage climate, where loan programs are terminated, guidelines tightened, private mortgage insurance restricted and geographical areas are being deemed soft: a preapproval letter is not any sort of guarantee that a home buyer will be able to close on a proposed home purchase.
So why bother with preapproval letters? Here is the current value of a true preapproval letter:
- It demonstrates that the buyer has completed loan application and is preapproved at that moment for a specific product.
- There is a level of commitment that a buyer has if they have provided all of their documentation to a lender over one who has not taken the steps to become preapproved.
- You know who the loan originator and lender is that the buyer is working with. I’ve recommended before, and especially do now, that Selling and Listing Agents give the Loan Originator a friendly phone call to introduce yourself…allowing you to see if the LO passes "the smell test".
What can you do if preapproval letters are worth less than they were before?
- I recommend that all buyers with a credit score below 700 and/or using less than 20% down have a "Plan B" for their mortgage scenario. Consider "what if" the mortgage scenario they are current approved for is terminated with no notice from the lender or if the area they are buying a home in is considered soft? Is your Loan Originator able to offer FHA or VA financing? Note: FHA and VA jumbos are quite attractive.
- Home buyers should start even earlier in the home buying process (six months to a year is fine). A Mortgage Professional can help improve credit scores and provide advise on how work on where they may need more strength to be on the best position possible to buy a home.
- Allow more time for preapprovals from lenders. Underwriting (and appraisals) are taking more time in this climate. Everything is being reviewed under a microscope.
- Review your current preapproval with your Loan Originator. There have been recent pullbacks with private mortgage insurance (including LPMI, Fannie Flex and Freddie Mac higher LTV products).
- Home Buyers should discuss with their Real Estate Agent (not the Listing Agent) the "what ifs" of losing their financing and how it may impact their earnest money deposit.
- Listing Agents should have their preferred Mortgage Professional review the preapproval letter should their be any doubt regarding the letter in question. The preferred Mortgage Professional can at the very least provide some valid questions for the Listing Agent to ask the loan originator and Selling Agent.
This market demands that you select a Mortgage Professional based on ability, expertise, commitment and available products. Trying to get the lowest rate in a market where rates change up to 3 to 5 times per day is insanity. A true Mortgage Professional will provide you with the most competitve rate available considering your current mortgage plan.