In 2004, at the height of the home buying boom, a survey came out from Campbell Communications indicating that fully 62% of the failed closings studied were due to home buyers being denied a mortgage – despite having “pre approval”. The company found that 39% of pre approvals issued by Internet-based lenders were invalid. Mortgage brokers were also showing significant signs of unreliability, with 27% of pre approval letters proving invalid. National lenders had their letters fail 19% of the time, while local banks dropped the ball on 14%. Credit unions weren’t far behind at 10% and the mortgage partners of real estate agents came in last with 9% found to be void.
A hot real estate market led many institutions to put through loans that should never have been allowed to get past the initial examination! However it is a cycle that can lead to some injudicious decisions – people want to buy homes, realtors don’t want to show homes to unqualified people, people go to lenders for pre approval… it is a nasty cycle that ends up with a lot of time wasted and sometimes a significant amount of money. It also set up unreasonable expectations on the part of the buyers – “I got pre approved and now I’m not approved at all?” which could very well have led many of them to less scrupulous lenders.
Some people think that the solution is a standardized letter of pre approval that is provided by a national organization such as the National Association of Realtors (NAR) or another recognized national association that can issue out pre approval letters based on a strict examination of the buyer’s proof of income and assets.
Other people think it is incumbent on the lenders to tighten up their pre approval process so that unqualified buyers never get a letter that makes them and the real estate professionals they deal with think that they have a chance at a decent mortgage. It may be cruel, so the thought runs, but so is the time and expense taken to put through a home sale that doesn’t happen. And it prevents financial disasters like today’s recession.
Another key tip for buyers with pre approval is to stop everything. Don’t make a major purchase, don’t change jobs, don’t marry, don’t start trying for a baby – just focus on getting the home purchase finalized. Major changes in one’s financial outlook can be disastrous for the final approval of a loan.
Pre approval does not mean final approval. In fact, if it is from an unreliable source, it means less than the paper it’s printed on. To make sure that a pre approval is genuine, buyers are urged to deal with reputable lenders and brokers, to take critical stock of their financial situation and to avoid making major changes to their lifestyle in the time between pre approval and the closing. To not do so can mean significant amounts of time, effort and money wasted and possibly greater ramifications, like the straits that our economy is presently in.
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