PREVENTING FALLOUT: 5 QUESTIONS EVERY AGENT SHOULD ASK (PART IV)

Okay, after covering down payment, income, and credit in Parts I, II, and III, let’s move on to the fourth important question.

Question #4: Are You Pre-Qualified or Pre-Approved?

When I speak with Realtors, there is inevitably some question about the difference.  And lenders will frequently take advantage of the confusion.

An agent of mine recently had a deal fall out at the 11th hour with a client whose lender had provided a pre-approval letter with the original offer.  When my angry agent confronted the lender, the lender shrugged and laughed as if to say hey, I lied, so what. 

To avoid that type of deception, here’s a convenient place to draw the line in the sand. 

A pre-qualification letter represents the loan officer’s opinion about the buyer’s qualifications.  A pre-approval letter says that the file has been formally approved by a lender.

Pre-Qualification

Since this is merely an opinion letter, you need to know who is rendering that opinion (see Part V). Would you trust a serious medical diagnosis to a med student?   No, you wouldn’t.  Since you don’t know this person and since the market is full of bogus pre-qual letters, you have reason enough to ask your client to speak briefly with your lender.   In doing so, you’ll be able to confirm the buyer’s qualifications and strategy.  For instance, do they need a credit for closing costs? 

I coach my agents to explain that by talking with me, they’ll be able to obtain a pre-qual letter from a well known and respected local lender.  In multiple offer situations, I have had my client’s offer accepted because the listing agent recognized my name.

Pre-Approval

Pre-approval letters should only be issued after the loan has been submitted and approved.  This is easier than it used to be, because most loans today are submitted through the the Automated Underwriting Systems.   A formal approval with a list of conditions is issued if the loan is accepted.

Here’s a tip: get a copy of that approval.  If the lender balks, the approval may be bogus.  And if the borrower is approved, you’ll get to see the approval conditions.  That’s critical, because there are sometimes conditions the borrower can’t meet.  For example, what if that stated income approval comes back approved as long as the borrower can provide tax returns.  Effectively, that’s a counter offer that the borrower probably can’t accept.  An approval is only as good as its conditions are reasonable.

There you go.  On to Part V