I was happy to see the issue of pre-approval addressed in yesterday’s Seattle Times. As most real estate agents will tell you, buyers need to get pre-approved for a loan before looking for a home. Now, I know that letting a lender pore over your financial records isn’t nearly as sexy as mentally arranging your furniture in a new house, but the consequences of skipping this vital step can be costly and frustrating for everyone involved.
According to Barron’s Dictionary of Real Estate Terms, “Pre-approval is the practice by a lender of authorizing a borrower for a certain loan amount.” In essence a lender says, “this is how much money we’ll loan this buyer.” When pre-approvals are correctly done, the mortgage broker or loan officer verifies the borrower’s income, assets, debt ratio, and so on, by examining the borrower’s W-2s, bank statements, and credit score, among other items.
However, some lenders are quick on the draw, offering pre-approval letters without thorough verification. Naturally, this can be enticing to buyers who are shopping in a fast-moving market, like ours here in Seattle. But postponing the verification process can have serious consequences for both the buyer and seller. A buyer who thinks he has authorization for a certain amount may submit an offer on a house and have it accepted, only to open the door to a mess of trouble. As the Times article states,
“What sort of troubles? Mainly an inability of the buyer to pass the lender’s underwriting tests for the amount needed to fund and close the loan. Then the deal often goes off the tracks, and the seller has to put the house back on the market - a huge waste of time for everybody involved.”
So, it behooves both buyers and sellers to be sure that the buyer is fully pre-approved. By doing so, there is much less risk of a transaction falling apart because of financing.
Remember, if a lender is willing to write a pre-approval letter without asking for any of your financial information, shop around a bit for a more attentive lender.
Have you ever been burned by a worthless pre-approval letter? We’d love to read your story. Just click on the Comments link below this post and tell us all about it.
