Are Mortgage Pre-Approvals All They Are Trumped Up To Be?

In 2002, Steve, a nice young man with a good job, serious savings, and excellent credit made an attractive offer on a two family house in a Boston suburb.

It had to be an attractive bid as there were three others, all of them at or above the listing price. Steve had lost out on several earlier offers in the hot New England Market so this time he did everything right. He had a home inspector on his speed dial so he could move quickly from offer to closing and with the help of his agent he put together a clean and sensible offer. Most important, he had a pre-approval letter from a lender stating that he was qualified to buy into exactly the kind of situation he was bidding on: an attractive property in excellent condition with a strong and demonstrable rental history and excellent cash flow. He would be owner occupant of the smaller unit, about to be vacated by a long time tenant, and the larger unit was occupied by three young women in the third year of their tenancy.

The home inspection was perfect and the property appraised out for $5 thousand more than the contract price.

In other words, a textbook situation.

Then the roof fell in.

A week before the mortgage commitment date - the time at which the buyer must notify the seller that he cannot get a mortgage and therefore cannot perform on his obligation to buy the house (at which point the entire deposit, some $25,000 in this case is at risk) the loan officer started making some disquieting noises. The original lender was not happy with Steve's income. The loan to value, even at the higher appraisal, wasn't quite enough to qualify for the program. One hour before the drop-dead deadline the loan officer admitted that he might not be able to issue the mortgage commitment letter and Steve, backed into a corner, withdrew his offer in order to save his deposit.

When confronted by a nearly apoplectic real estate agent the loan officer said that he had issued to pre-approval letter "to keep Steve on board."

Happily, Steve did, in the end, get the house. Perhaps not so happily the loan officer also collected his commission although no one was speaking to him at the closing. But, it turns out that this is apparently not an isolated occurrence.

Kenneth Harney, a nationally syndicated real estate writer, recently reported in Realty Times and The Washington Post that a new study which polled over 1,700 real estate agents around the country revealed that faulty mortgage loan pre-approvals are a major reason why sales fall apart before settlement.

The study faulted the growing number of mortgage applicants using sub prime and other non-conventional mortgage programs and opting for "stated income" mortgages. In such cases the pre-approvals are issued based on that stated income and lenders are often less than thorough in checking out credit and other factors before issuing pre-approved loan letters.

While pre-approval letters that prove to be less than advertised can throw a house sale into disarray, there are also those pre-approvals that convince homeowners seeking to refinance that they are qualified to receive an attractive interest rate which vanishes only after the homeowner has paid a non-refundable application or appraisal fee.

Information at this point is anecdotal which is why we would like to conduct our own Mortgagenewsdaily.com survey. If you, as a consumer, real estate agent, or mortgage loan officer have encountered pre-approvals that were not worth the paper they were faxed on, please tell us your stories. Send them to the email address listed below and please provide some contact info - phone numbers appreciated - so that we can follow up with you. All sources will be kept confidential if the correspondent desires. If you would just like to tell your story, you may also post it in the comments section below. No personal information is required for comments.