The Myth About Mortgage Pre-Approvals

It's early Saturday morning and Tom and Susan are celebrating. You see, their real estate agent just called to let them know that the seller accepted their offer. Tom and Susan were finally about to become homeowners.

Their realtor indicated that the seller decided to accept their offer over similar offers simply because they were pre-approved for a loan. Tom and Susan thanked their agent since it was her idea to obtain a pre-approval prior to submitting an offer. Excited, they immediately called family and friends with the good news.

About three weeks later, Tom and Susan received a different telephone call. This time it was the loan officer at their bank. He was calling to let them know that there was a problem with their mortgage: the loan was denied final approval by his underwriting department. The reason was insufficient income.

As you can imagine Tom and Susan were not only devastated by the news, but confused as well. How could the same lender that issued a pre-approval now be turning them down?

Unfortunately this scenario is very common.  In fact, the New York Department of Banking issued a statement citing that a New York based lender issued 14,000 pre-approvals in a two year period and was only able to honor 450 of them with a final approval or loan commitment.

How could this be possible? Here's how:

To begin, there is a fundamental problem within the real estate community with the use of the term "pre-approved" mortgage.

By itself, the word "pre-approved" gives the impression that a decision has already been made about the applicant. And since most of us have at some point received "pre-approved" letters in the mail from credit card companies, the terminology appears familiar.

The problem is that quite often a pre-approved mortgage, like pre-approved credit cards, is nothing more than a "preliminary” review - a cursory look at an applicant's financial picture typically done by a loan officer or a bank representative to determine if a person would qualify for a home loan

However, the full approval or “loan commitment” that guarantees the financing is only issued after the loan application is reviewed and cleared by the “underwriter” – the decision maker for the lender. 

To issue this “Full Approval”, the underwriter will test an applicant’s supporting documents (pay subs, bank statements, credit report, etc) against the underwriting guidelines for the loan program and if satisfactory issue a Full Approval.  It is during this “underwriting process” where too often the initial pre-approval issued by a loan officer renders itself worthless because the applicant fails to meet the underwriting guidelines for the loan program.

The clear distinction between the two is that in the case of a Full-Approval, the loan has been reviewed by the decision maker (the underwriter) and not simply by the loan officer (the sales person) for the lender. Regardless of the loan officer's experience, he or she is not an underwriter.

In short, if the pre-approval you received means "pre" underwriting, then all you really have is a preliminary review that may mislead you into believing a Full Approval will come later in the process.

When building a partnership with a lending professional, insist on a receiving a Full Approval prior to signing a sales contract.  That way you know the home financing you need to complete your purchase is ultimately guaranteed.

This article is provided compliments of Joseph Farella, CEO of American United Mortgage Corporation and Author of “Insider Secrets to Home Buying Success”.