It has been a while since I wrote about pre-qualification. It seems I need to write about this more often. Lenders hand out pre-qualifications like candy, with little analysis, little required documentation, and then homebuyers go out into the marketplace making representations they cannot meet. And then they lose money. How? Read on.
I want to relay a story via an email from a new client, who was someone I almost worked with in the past:
“My husband and I are prospective first-time buyers and would like information about appropriate mortgages and what we qualify for. We are interested in finding out what we need to do to strengthen our application. You and I last spoke during a traumatic real estate experience for us in 2003 where the lender we chose to work with admitted messing up our pre-qualification (writing it based on w-2 employment and not self-employment, and we had been self-employed for 1 year at that time) and sending us out in the market with grossly exaggerated amounts which the underwriter ultimately refused. This forced us to cancel our contract the day before settlement and we lost our deposit and other fees. We are only now looking at trying again, 9 years later. So we’re quite gun-shy and moving very slowly through this process. Please let us know what you need from us next.”
I imagine I asked too many questions in 2003, and the lender they chose to work with asked very few questions, obviously. And they chose to work with the lender that seemed easier to work with. And they lost money. If they had finished up the pre-qualification application with me, I would have told them they needed a minimum of two full years of self employment, and were not eligible for a loan at all with only one year of self employment. The other lender must have simply asked them “how much their annual income was each year,” without digging any further and asking if it was salaried income, self employment, and if there is any overtime, commission or bonus income built in. Poor form.
The process is much harder now, but was no picnic in 2003, and has never been easy, ever. So if you get a lender who asks few questions, which seems to happen often, it is not a legitimate pre-qualification. The formal approval process takes anywhere from 30-40 days, so to get a pre-qualification simply cannot happen in a day, let alone an hour.
Unless you are salaried with no overtime and bonuses, and no changes in your bank account larger than $1,000 in the last few months, and no new credit recently, and no gift money, and have perfect credit; then you need to go through an extensive pre-qualification. It seems every pre-qualification I see these days has a curve ball, that needs a lot of time and some amount of paperwork to work out. So please realize that the only pre-qualification that counts is one that is not easy to get.