By Chris Platamone
So much has changed in lending in the past few years, including the importance of a thorough preapproval. These days, not only is a preapproval a good idea for any borrower, in most cases it is absolutely required when making offers on bank-owned properties. But this has not always been the case. + Back in the days of the real estate and credit party of the mid 2000’s, most people used the term prequal and preapproval interchangeably. Indeed, there was not much meaningful difference between the two when borrowers were obtaining loans simply on a signature. Anyone showing a prequal letter for a million dollars was assumed to have spoken with a loan officer and not much else. Certainly their capacity to repay the loan had usually not been verified. While the letter understandably carried little weight, the problem of course was that those million dollar transactions actually did close all too often, and we all know where that brought us.
Since we can generally agree that those days are gone and not returning for a very long time, if ever, it might be worthwhile to define a solid preapproval and to understand why it is so important.
A prequal, for the record, is still generally accepted to mean simply that you have consulted with a loan officer and received an estimate as to how much of a loan you can qualify for. It is based on information provided by the borrower but not verified or signed off by anyone with the authority to do so, and in the current climate of tightening guidelines and declining income is considered obsolete. A preapproval, by contrast, means that a borrower has submitted a complete application, along with income and asset documentation, which has been reviewed and compared with current liabilities as shown on a credit report. In more complex self-employment situations, everything may have been reviewed by one or more underwriters as well. Depending on what is found on the credit report, there may also be some clarifications or letters of explanation required, which the proactive borrower will complete at this stage rather than waiting to address at closing.
There are good reasons to go through all of this process before shopping for a home and making an offer. Perhaps the most important is that most asset managers–those who handle the processing and sale of bank-owned properties— won’t even consider an offer that is not accompanied by a preapproval letter. They want to know up front that the person tying up the property with an offer has consulted carefully with a lender and given some thought to qualifying as well as affordability. Given the ever-constricting maze of guidelines that govern the funding of loans today, this is an understandable precaution to take. Even with the strongest of preapprovals, it’s far from certain that any given transaction will close. There is any number of impossible to foresee factors that can derail a transaction at any point in the process. From appraisal to title to skittish investors, the path to closing is littered with challenges. But what is clear is that the days of throwing incomplete or false applications into the system and then hoping for a miracle at closing are long gone. More than ever before, the value of consulting with an experienced loan officer is evident and will pay big dividends as you get deeper into an escrow. Even more than this, it’s just good business for everyone involved in the transaction—buyers, sellers, agents, escrow and title professionals, as well as lenders– to work towards closing solid deals that can sustain a healthy real estate market for the long term.
Chris Platamone
Senior Loan Officer
Integrated Mortgage Management
74245 Highway 111 Suite 201
Palm Desert, CA 92260
office (760) 834.7255
mobile (760) 861.9495
fax (760) 841.4535
email Chris@IMMgmt.com
DRE# 01292873
NMLS# 632936
