Below are excerpts from a recent Forbes article that is required reading for all buyers and most real estate agents…
Mortgage pre-approvals are pretend documents. It is true that preliminary mortgage approval is an essential first step in the home buying process as real estate agents and sellers want proof of a buyer's ability to secure a mortgage and bid on a property. Buyers want it to know what their buying power is and what their potential payments and costs will be. Mortgage people see it as the first date in the courting process with new buyers. Everybody sees it as a good idea, a prudent and powerful first step on the oft perilous journey to homeownership. So what's the problem?
The fact is that mortgage pre-approvals are not processed and reviewed by underwriting people and they are not subject only to an appraisal, but to a multitude of other conditions…even though most of them don’t say that. .
As21st century mortgage technology has accelerated, so did the proliferation of easy-to-get mortgage financing. The rise of Wall Street securitization of MBS (Mortgage Backed Securities), created an almost limitless variety of mortgage products and a market where everybody got approved. Pre-approval was automatic because regardless of the borrower profile presented, a mortgage product could be found. Remember, this was when income and assets could be pretend because verification was not a requirement, marginal credit was just fine thank you, down payments were unnecessary because 100% plus financing was available in a variety of forms, heck you didn't necessarily even need a job to get a mortgage!
Needless to say, the mortgage pre-approval vetting process grew even more suspect.
Then in 2008, it all collapsed. Defaults, foreclosures, loan buy backs and billions of dollars of bad loan losses changed the mortgage underwriting process forever. Now…we are in the age of the double and triple checked, redundantly verified, every nook and cranny financial detail examined era of mortgage loan approval.
Paystubs and W2s used to be sufficient income proof for salaried people, but now tax returns were added to the mix to sniff out deal killing unreimbursed employee expense write-offs. Unidentified deposits into asset accounts now require sourcing evidence to determine origin eligibility. Absent the ability to document where the money came from, the asset is eliminated even though the money is right there in the account. Unless these mortgage approval land mines are fully vetted in the preliminary approval process, purchase contracts live in fear of never closing.
Even when critical decision making documents (tax returns, paystubs, bank statements), are secured early in the game, there is one significant asterisk that prevents mortgage pre-approval from being what everybody wants it to be, and here is where the con comes in. Mortgage pre-approvals are done by loan officers, not by underwriters. Loan officers source and originate mortgage loans, they collect your information and your documents and submit your mortgage loan to a team of processors and underwriters, loan officers do not have the authority to approve your loan. These processors gather, organize and confirm your information, then give your file to an underwriter for approval. Underwriters are trained and anointed with the authority to give final approval to your loan.
An underwriter has not approved and issued your mortgage pre-approval, your loan officer did. There is no processing of the preliminary loan file and there is no underwriting review. There is automated underwriting, there is loan officer review and there is hope that a high level of thoroughness was thrown in. Underwriting guidelines are many, and it is the charge of the loan officer/mortgage rep to completely anticipate barriers to approval before signing off on a deal making, everybody's counting on it pre-approval letter.
At the end of the day, the best that we can hope for from a pre-approval is that the buyer or borrower has been well vetted and deemed mortgage-able.
The sooner you, as a buyer, starts the mortgage process…getting all of the required documents into the hands of your lender…the better your chances of not running into significant issues late in the home-buying cycle.
Thanks for reading…Steve Jackson (561.602.1258)
