Did mortgage hassles cause the rescheduling – or even cancellation – of the closing on your home purchase?
Did the lender not quite get everything together because of processing” or underwriting delays? Were there appraisal problems? Or unexpected complications related to the seemingly rock-solid “preapproval” or “prequalification” letters the mortgage broker or lender provided to help you shop for a home?
If your answer is yes, a new study suggests you ve got a lot of company. Fully one in eight home purchase closings now gets knocked off track by mortgage-related issues, according to a survey by market research firm Campbell Communications of Washington, D.C. Another 3 percent get scuttled altogether. The study covered a statistically representative national sample of 1,400 real estate agents and brokers and was commissioned by Inside Mortgage Finance, a lending industry publication.
Among the problems that appear to be getting worse:
Widespread misunderstandings among home buyers, lenders, and realty professionals about the real meanings of preapproval and prequalification letters.
According to the realty agents interviewed for the study, one out of 10 preapproval letters turn out to be “invalid.” That is, when the home buyers apply for a mortgage based on the preapproval letter, the mortgage lender or broker cannot deliver what the letter appeared to promise.
From the perspectives of realty agents and home buyers, this can amount to a deal-busting disaster, since the buyers may have negotiated the purchase price of the property based on the belief that they had credit up to a certain dollar amount.
Mortgage brokers and lenders have a sharply contrasting view of the matter. They say realty agents and home buyers often fail to read the text of prequalification and preapproval letters. Both types of letters typically hedge their promises in ways that nobody should ignore.
To avoid getting derailed next time around, here s a quick primer on what you need to know about preapprovals and prequalifications. For starters, there is a big difference between the two. Prequalification simply means that somebody – a mortgage broker or a loan officer – has looked at the financial information you submitted, and concluded that you may be eligible for a predefined maximum home price and loan amount.
The key point to remember about most prequalification letters is that they represent nothing more than a preliminary assessment of your financial picture and creditworthiness. Steve Galante, a loan officer for Broomfield, Colo.-based Myriad Financial LLC, says prequalification letters may not be “worth the paper they re written on. They are definitely not a commitment to make a mortgage.”
Preapproval letters, by comparison, have more solid grounding, but are still carefully hedged. For mortgage brokers, a preapproval usually means that the broker has taken your key information and run it through some form of underwriting system to arrive at a sales price and loan amount range for which you appear to be eligible.
The underwriting systems used may be Fannie Mae s or Freddie Mac s popular online services, or a lender s proprietary evaluation program. Preapproval, in other words, takes you a big step beyond mere prequalification. But it s still not a mortgage commitment.
Here s how Myriad Financial words its standard preapproval letter. First it reports to the buyers that, having run their information through an underwriting program, “your financial profile meets (Fannie s or Freddie s or a lender s) guidelines and you are eligible for financing” in the amount and terms stated in the letter. Then it warns the home buyers that “any new accounts you open, credit charges incurred or credit inquiries entered on your credit report subsequent to the date of (the letter)” may change the whole ballgame – the “qualifying price range and the interest rate you have been quoted.”
The letter adds a final caveat: “Please note that your loan will need to be officially underwritten and given official approval before funding of the property may take place.”
What can come in the way – and delay or significantly change – a loan deal quoted in a preapproval letter? Most mortgage brokers and lenders can supply a long list of underwriting nightmares, from credit reports that turn out to be not as squeaky-clean as expected, to car-payment or mortgage defaults made after the preapproval letter was issued. Or bank deposits declared for preapproval purposes that turn out to have been gifts, not eligible for inclusion under the lender s underwriting rules.
The bottom line? Prequalification and preapproval letters may be reassuring to have in your pocket as you shop for a home – and even impressive to home sellers. But read the not-so-fine print: If your appraisal comes in low, your credit scores hit the skids, or your income and assets don t pan out, the mortgage you are “preapproved” for may not be the one you re likely to get.
Ken Harney is a real estate columnist for The Washington Post