Pre-approval Letters – Long Version Summer 2022

Hello, I wanted to do a video on a really important topic, which is “Pre-approval letters.” I’ve come to learn that a lot of pre-approval letters that realtors might be looking at are really pre-qualification letters. But they still say, “Pre-approval.” Why are they just pre-qualification letters? Because the loan officer hasn’t run it through the formal process and gotten the file actually underwritten. They may have done some of their own analysis.

Loan officers may only run the file through the “automated underwriting” software

They may have even run the loan through the automated underwriting software. But that’s not the decision maker. Software is not the decision maker, the human underwriter is. So real pre-approval can take, honestly, a couple of weeks or longer. Maybe a week, but not likely. More like a couple of weeks.

There is a formal process for Pre-approval Letters

Because what happens is, buyer makes loan application, buyer uploads supporting documents, file gets assigned to a loan processor, loan disclosures go out to the buyer. We, we call them the TBD disclosures, which stands for, To Be Determined. That’s what we put in the property address field since it’s just a pre-approval. But they have to actually sign loan disclosures. They’re only illustrative, they’re not binding. But that’s what helps get the loan in the system to put it in front of an underwriter. We’ve got to structure it as a formal loan. So they have to sign these TBD loan disclosures.

Loan processing – Pre-approval Letters

The loan processor will analyze the file. See if anything’s missing from what the buyer initially submitted in the way of documentation. There’s almost always more needed. Buyer may take a couple of days to provide that. Each of these steps is very manual, each of them has a queue, and each of them can take a couple of days. Nobody just snaps their fingers and does each of these steps. So the buyer, not really understanding there is a sense of urgency, they could take a week. Which just adds all that time to the process. Most often, they don’t provide them, you know, in 10 minutes or an hour, or a day. And they should only take 10 minutes. We’re just talking about uploading some PDF files. But it gets procrastinated and gets put off. Then, when the loan processor feels they have everything they need, they send the file to the underwriter.

Underwriting – Pre-approval Letters

Again, there’s a queue. The loan gets submitted to the underwriter. Maybe they pick the file up in a couple of days. Usually, they have the file underwritten the same day. Then we’ll see if there’s other things needed from the buyer or if we’re done. Again, it’s a week, best case. It’s probably more like two weeks. I’ve had to take a month or two just because the buyers just kind of go to sleep on the process. And until they find that house they want, they don’t really take it seriously. And that’s the rub. You’ve really got to help loan officers push people to go through the formal process so they get a real pre-approval letter, not some quirky loan officer opinion that.

It might be titled a pre-approval letter, I promise you, many times out of 10, it is not. Because the buyers don’t give us enough time to take them through the full process.

Buyers wait until they find a house they love

I’ll get a call on a Saturday afternoon, “Brian, I know you’ve been trying to reach me for a couple of months now. I’ve been so busy, I’m so sorry. But I just saw a house I loved. I have to have it. Offers are due Monday by 1:00 PM.” Okay, well you’ve put me in a bad position. There’s no way I’m going to get a formal pre-approval letter done.

A real world example of fake pre-approval letters

This is important because this creates problems that some of the realtors out there have suffered from. I just got a phone call from a realtor friend of mine who said, “A client went to an in-house lender.” I won’t say any names, not the name of the individual loan officer nor the company they work for. But they sit inside a local realtor’s office. Pre-approved somebody for a $600,000 loan amount. But they didn’t really underwrite it. They just kind of eyeballed it on their own and gave it their own opinion. The buyer waives all their contingencies, gets under contract.

A $600,000 pre-approval magically became $300,000!

And then a week into the deal, the loan officer finds out, “Oh, my goodness. I didn’t realize the wife, who was W-2, stayed at the same law firm, but recently went to an hourly wage. Like a month prior. Well, if you don’t have a two-year track record of hourly wages, you can’t use that income.” Now all of a sudden he’s telling the clients, “I’m sorry, you’re only approved for $300,000 mortgage,” just on the husband’s income. They’ve got to scramble and find another $300,000 or lose a $50,000 earnest money deposit. How many times have you heard of a similar story like that?

The pre-approval process should be thorough

Or maybe the loan goes through, but the loan officer misses something. And they’re asking for things. “Why are you asking for these things? I was pre-approved. There should be an easy process.” Well, if it’s a formal pre-approval underwritten by a real human underwriter, it should be an easy process. It should be an appraisal, title work, and maybe a couple of updated pay stubs or bank statements or something. If the buyer starts going through all kinds of paperwork, it wasn’t a full, formal pre-approval. If the buyer runs into a problem, it certainly wasn’t a full, formal pre-approval.

Be careful

So I think the, the takeaway is, if you’re looking at a pre-approval letter, certainly as a listing agent, call the loan officer and say, “Was this underwritten by a human underwriter? Did this go through the whole process?” I don’t care if you analyzed it. You’re not the decision maker. No offense. I don’t care if you ran a loan through the automated underwriting software. That’s not part of the process. Software is not the decision maker. A human underwriter is. This is a really big problem. And I’ve just seen more and more of these issues. And over the last couple of years when everybody’s been waiving their contingencies, you better have a buttoned-up, real-solid pre-approval letter. Or buyers are going to get in trouble and deals may fall apart.

Realtors should not show property to buyers who are not fully pre-approved

So no reason to go through that angst. We in the lender community; just need more time with the buyer. Don’t put them on a drip campaign, don’t show them anything. Wait until you know that a loan officer has sent a loan through a formal underwriting process and that they’ve really been underwritten by an underwriter. Then you’re good to go. Then there’s no problems. That’s what we’re trying to do here.

I’ve been told, “Underwrite your loans through the underwriting department. Don’t make the call on your own.” Because that’s a potential lawsuit for the lender. If we’re out there saying, “You’re pre-approved,” and you’re really not, you’re just pre-qualified, but I’m labeling the letter pre-approval, that’s a big issue. Anyway, that’s my one topic for now. I wanted to do this in a video because it’s a lot. I mean, I could have written a book on this. But hopefully, this video will suffice. And make sure you’re asking the question, “Was this underwritten by a human underwriter?” Hope this helps. Touch base with any questions, call, or email. I hope to hear from you soon. Thanks.

Contact me to discuss your local housing market, mortgage rates, or other mortgage questions. Click here to schedule a call or you can email me directly.