Letters touting a buyer’s preapproved status for a mortgage can present a dilemma to sellers who don’t know how much stock to put in a lender’s claims when nearly one-third of mortgage applications for home purchases fall through. “Preapproval letters are only as good as the trustworthiness of the loan officer who issued them,” said Realtor and lender Sweth Chandramouli of Ethical Homes, a mortgage and real estate company.
At the same time, the letters have never been more important, particularly in the Washington area, where multiple contracts on mid-priced houses and all-cash offers are making a comeback.
In this environment, sellers cannot take buyers seriously unless they are preapproved with “an ironclad letter,” said Weichert Realtors managing broker Karen Trainor.
While not all preapproval letters are ironclad, they can’t make unfounded claims either. The Secure and Fair Enforcement for Mortgage Licensing Act requires that “anything you say in the letter you must be able to prove,” said Fred Bowers, vice president of residential lender Intercoastal Mortgage Co.
A preapproval letter also is better than the meaningless prequalification letter, which buyers can get before even completing a mortgage application, according to Brian Block, a Realtor and attorney with Block Real Estate Group. Beyond that, the quality of preapprovals varies because lenders are not required to verify assets, confirm employment or run the borrower’s qualifications through underwriting until there is a contract.
To determine how solid a preapproval letter really is, Realtors often call the loan officer to ask what the lender has checked about the buyer.
“If they’ve run the file through an automated underwriting system, where the details of the loan are compared to Fannie and Freddie’s guidelines, I’m 75 percent confident that the loan will go through,” Chandramouli said.
To be 85 percent confident, he wants the lender to have looked at the buyer’s documents and verified the information.
After a contract and an appraisal are in place, even the conditional approval letter that follows cannot offer 100 percent assurance the loan will go through. Often, the remaining contingencies concern the property itself, like the need for a clear title or mortgage insurance, but occasionally, the lender discovers something unexpected during a final credit check.
“Sometimes, buyers do dumb things right before closing, like buy a Mercedes or change jobs,” said Bowers.
