Loan Pre-Approval Means Nothing

The only Pre-Approval I trust is one that I wrote myself.

I got this search engine hit:

pre-approved loan underwriter changes terms illegal

I have gone over these issues in discussing the pre-qualification.

Loan officers are salespersons. There is intense pressure on them from supervisors, brokers, stockholders and their own pocketbook to tell you what you want to hear. A large proportion of the people who ask me for a either pre-qualification or pre-approval already have a property in mind, and they get angry if I tell them it appears to be beyond their means. They should be kissing my shoes because I'm trying to keep them from making a half-million dollar mistake, or at least make certain they go into it with their eyes open, rather than just keeping my mouth shut and pocketing my commission. Most of these folks just go get their "Think Happy Thoughts" letter elsewhere.

Furthermore, if the loan officer is counting upon referrals from real estate agents for a living, if they tell people what they can really afford, they're getting the agent angry to no good purpose. This agent thinks they have a commission check all lined up, and the loan officer is trying to talk the buyer out of it, threatening that commission check. Most Real Estate Agents do not respond well to this, I'm sad to report. In that situation, I would be thinking, "Boy, I'm glad I found out now, before the default, when investigators and lawyers and courts get involved," but most agents (and their brokers) see only the immediate check that just evaporated. One such experience is all it takes before they not only stop referring to that loan officer, but try getting any clients they may have in common away from that loan officer. This may be short-sighted, but it is also human nature.

Not to mention the fact that nothing about a pre-approval or pre-qualification is binding. In fact, until the underwriter writes a loan commitment, there is nothing that says you have a loan at all. Furthermore, it's rare for loans to be rejected outright. What happens far more often is the underwriter puts one or more conditions that the applicant cannot meet on the loan commitment.

Furthermore, there is nothing about any loan that says the terms cannot change unless there's a rate lock in effect. If the loan isn't locked, it's not real. Quite often, loan officers will tell people their loan is locked when it's not. Locking paperwork can be easily faked.

Finally, while the new 2010 Good Faith Estimate makes lowballing on the costs more difficult in that it adds more hoops for the unscrupulous to jump through, it does not prevent the practice or stop it. Keep in mind that last word "estimate". Furthermore, they are not promising that you will get the loan. That requires a loan commitment written by an underwriter, and if further investigation by the underwriter reveals more questions they want answered in order to fund your loan, the underwriter can always add more conditions. None of the paperwork you get at loan sign up promises you will end up with a loan at all. You want to know why, consider that when the lender starts to verify the applicants information, they come across information indicating it's all fraudulent. This happens. It has happened to me, and it happens to loan officers somewhere in the United States every day.

Even with the best will in the world, I can't guarantee you've got a loan until I get the loan commitment from the underwriter. I can go through all the guidelines for a given program, and make certain the borrower meets every single one of them. It doesn't mean anything until the underwriter writes that loan commitment. I don't have the power to approve that loan - no loan officer does. Loan commitments are the exclusive province of the underwriter. A good loan officer can and does go through guidelines to ascertain whether there's an known reason that you will be turned down. If the underwriter rejects the loan, none of it means anything.

This is one of the reasons that I have written several articles explaining how to calculate what you qualify for, in terms of payment and in terms of purchase price, so that you will not be at the mercy of somebody who tells you, "Sure you can afford it," while qualifying you for a "stated income" negative amortization loan. The most mathematically correct and detailed of those articles is Should I buy a Home Part I, while the most accessible is How to Tell If You Can Afford This Property.

If you don't have a lock, the loan is not real, and it will fluctuate with the market - every day for A paper. Until mid-2009, I used to lock every single loan upon application, but the lenders have now made that practice financially prohibitive - a loan officer who does it can expect to pay "fall out fees" that drive their cost of business up until what they can offer consumers is no longer competitive with anyone. What I can still do is guarantee all fees except the tradeoff between rate and cost, and consult with a client upon the optimum time to lock those in, which now has to wait until after the loan commitment. Even that is not absolute, however. The loan officer cannot really promise you that loan until the underwriter writes a loan commitment with conditions you can meet. Even that can change if the underwriter discovers new information, but always remember that the loan officer is not the underwriter, and there are regulations preventing direct contact between consumers and underwriters. If the underwriter rejects the loan (or doesn't approve it), you still don't have that loan. You can choose another one, that you are likely to qualify for, or you can do without. I'll tell people that if the loan officer gets back to them within a week with a change, it's likely that they're honest and they really thought you qualified for the loan they told you about in the first place. If it takes them three weeks or longer, or if they spring it on you at closing, I wouldn't believe they were honest with sworn testimonials from George Washington, Abraham Lincoln, and Diogenes that they saw the whole thing, and it's not the loan officer's fault. It's not for nothing I tell people, "When There Is A Problem, It's Good If They Tell You Right Away"

Only when you have a lock agreement, loan costs guarantee, and a loan commitment from the underwriter do you have a deal going that somebody might be able to stand behind, in the sense of being able to hold them responsible if they don't deliver on exactly those terms, and even then there are limitations. Of course, what really used to happen with most loans (and still does with a large number) is that loan officers tell you about loans they have no prayer of being able to deliver in order to get you to sign up. This is despicable, but it's the way things are. There are reasons why the situation is complex, but that's no excuse for loan providers to play any additional games to obscure or confuse something that is already complicated enough. Part of the reason that I'm writing here is that I would like to change this for the better, but the power to demand real change is in the hands of consumers, not any individual provider.

Caveat Emptor

Original article here