There seems to be a lot of confusion around what an approval letter is, what a pre-approval letter is, and what these documents are worth since some don’t seem to hold up when it comes time for the underwriter to approve the loan and issue a final commitment letter.
All these letters are usually issued prior to writing an offer on a home. The buyers use them to show the sellers that they are going to get their loan and should have no problem. Some people think these letters are iron clad, and many people seem to confuse what they really mean.
An approval letter means the loan is approved, this is akin to a commitment letter. And there is no way for any lender to issue an approval letter without all documentation (W2’s, tax returns, bank statements, pay stubs, etc.) in the file, including 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, and the letter should be written as a “pre-approval” letter.
A pre-approval letter means someone (the loan officer, mortgage broker or the underwriter) has reviewed 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). It may mean the lender has crunched the numbers on the back of an envelope and everything appears OK. It usually includes a credit report being pulled. 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 (a bank will ultimately require all 3, and the best pre-approval letters should be based on all 3 scores).
-was the loan run through an automated underwriting system or not?
-how long is the pre-approval letter good for?
The trouble is that buyers don’t want to do the work to get as strong a pre-approval as possible, which 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, and how solid the pre-approval is and what it is based on. For buyers that may be reading this, think if you were a seller, and what you’d like to see and what you’d expect if you were going to take your home off the market and rely on a buyer to perform as promised.
Some buyer’s have relied on weak approval or 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, and we 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, not balk at sending in some paperwork, and take some time and 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 Mortgage, a division of Capital Bank. 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. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Mortgage or Capital Bank.
Tags: preapproval letter