There seems to be a lot of confusion around documents such as approval letter, pre-approval letter, and a pre-qualification letter. What are these documents worth? Some don’t seem to hold up when it comes time for the underwriter to approve the loan and issue a final commitment letter.
These letters are issued prior to writing an offer on a home. Buyers use them to show the sellers that they are going to get their loan and should have no problems. Some people think these letters are iron clad. Many people seem to confuse what they really mean.
Approval letter
An approval letter means the loan is approved, this is akin to a commitment letter. This means the file was reviewed and underwritten by an underwriter. And there is no way for any lender to issue an approval letter without all documentation such as W2’s, tax returns, bank statements, pay stubs, etc. This also includes the appraisal, and that is usually never the case when an offer is being written.
So if you get an “approval letter” when making an offer, the bank or lender is likely using the wrong semantics. Instead the letter should be written as a “pre-approval” letter. An appraisal on a home is not done before an offer is made, so sellers and realtors should never be getting approval letters with a buyer’s offer. Approval letters come at the end of a transaction, after a seller and buyer have agreed on price and have a ratified sales contract.
Pre-approval letter
A pre-approval letter means the underwriter has reviewed the documentation on the finances of the buyer and that things look OK. It may mean the lender has run the numbers through an automated underwriting system and gotten an approval, pending receipt of the appraisal and other documentation. Or maybe the loan officer has crunched the numbers on the back of an envelope and everything appears OK. A credit report should always be pulled. Technically, a pre-approval letter should have been reviewed by the underwriter since loan officers do not have loan approval authority. If a loan officer is the only one to have reviewed the file, then the letter that should be issued should only be a pre-qualification letter. Pre-qualification letters are only a loan officer’s opinion, so proceed with caution.
Question to ask
No matter what the letter says in writing all parties should be asking a lot of question as to what work actually went into the letter:
-Were the buyer’s income and assets documented, or just verbally noted?
-Was a credit report pulled, if so was it a report that included all 3 credit scores from all 3 credit bureaus, or was it just 1 credit score
-Was the loan run through an automated underwriting system or not?
-How long is the pre-approval letter good for?
–Most importantly: get the file reviewed by the underwriter, not just the loan officer software? HINT: for the most certainty, it needs to be an underwriter!
Why is this so important?
The trouble is that buyers don’t want to do the work to get as strong a pre-approval as possible. This work includes W2’s and/or tax returns, bank statements, pay stubs and possibly more. Most buyers just want to quickly review some numbers verbally with the lender and get a piece of paper within minutes that says their loan is approved. But quick number crunching is only a salesperson’s opinion, and not to be relied on.
Sellers deserve to know if the buyer is approved or pre-approved or pre-qualified. They deserve to know what the letter is based on. For buyers that may be reading this, think if you were a seller. What would you like to see and what would you expect? If you were going to take your home off the market and rely on a buyer to perform as promised, you want certainty.
What is there to lose by not doing a thorough pre-approval?
Some buyer’s have relied on weak pre-approval letters and have lost their earnest money deposits. I had a buyer call me who was self employed for only 6 months (you must be self-employed for at least 2 years) and somehow got a pre-approval letter from a loan officer at a bank. The loan ultimately got denied and they lost their $50,000 deposit! They came to me after going to the first lender and I was able to find a loan option for them that included co-signing parents. They wrote a new offer on the same property since the first one was voided and the seller’s had not sold the place. And we salvaged the loss of their deposit. But, it was a close call and they almost lost the $50,000!
So buyers should offer up a lot of information, and not balk at sending in paperwork. They should take the time to make sure they are getting a solid pre-approval letter.
And sellers and Realtor’s should ask a lot of questions to see what the pre-approval letter is based on.
Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.
Can the broker put our credit score on the letter???
I was told it is unlawful to post them on the approval or pre-approval letter???
Credit scores are not supposed to be quoted, no. But sometimes, if in a competitive situation when bidding on a property, and if a buyer authorizes me to do so, then I may tell a seller/listing agent about a buyer’s credit score. Or, the buyer may choose to do so directly themselves, and share their credit score with a seller/listing agent without the lender doing so. But a lender should not be discussing credit score with anyone without the buyer’s permission.