When you meet with a loan officer, they will often pre-qualify you. Pre-qualification is a simple, quick process of estimating the loan amount. After a few questions, some loan officers will calculate an approximate monthly payment and loan amount, and issue you a pre-qualification letter that states you have been pre-qualified contingent upon verification of income and credit. This is a useful process, but it is only as a first step to loan approval. Unfortunately, pre-qualification has caused borrowers problems when loan officers represent pre-qualification as reliable information.
Recently, I watched this situation unfold. A loan officer issued a pre-qualification letter and suggested the buyers start looking at homes. They quickly found a home they liked, made an offer, accomplished an agreement with the seller, paid for an inspection, opened escrow and returned to the loan officer to begin the loan process. A few days later, they were informed that they qualified for less than the pre-qualification letter stated. They could not purchase the home because they could not secure a large enough loan. They not only had to walk away from a home they had fallen in love with, but also invested considerable time and money in because they were not aware of the differences between pre-qualification and pre-approval.
Let’s consider two other scenarios.
The borrowers are pre-qualified for a certain amount and are just two days away from moving into their dream home. They have already given notice at their current residence, packed everything in boxes, and hired movers. Then they suddenly receive a call from their loan officer, who informs them that they don’t qualify for their loan. They are devastated. “But all is not lost,” she tells them. “The lender will make the loan, if you are willing to pay a higher interest rate and a few thousand extra dollars in closing costs.” Why did this happen? Because lenders are not obligated to approve a loan for what is stated in a pre-qualification letter.
Loan officers often know that they are in competition with each other, and borrowers are shopping around for the best rate. They know that if they issue the highest loan amount and the lowest interest rate, their borrowers will eventually return before they obligate themselves to another lender–especially if that lender has quoted a realistic loan amount and interest rate. So, after shopping around, our borrowers in this scenario decide to take “the better deal” (higher loan amount, lowest interest rate). But guess what happens after they make an offer on their dream home? You guessed it: a higher interest rate and smaller loan. The borrowers try to switch lenders, but it’s too late.
The Bottom Line?
The first step in securing a home loan should be obtaining a letter of pre-approval. That means underwriter approval contingent upon house and appraisal, plus credit and income have been verified. Remember, loan approval should not cost you any money except for your credit report. You can also fill out a loan application at more than one lender. (If your loan officer tells you that applying with another lender will weaken your credit report, it’s time to get another loan officer! You are most likely listening to a sales tactic). As a loan officer with more than 12 years of experience, I strongly recommend that all of my clients complete the loan approval process before they start their home search so they know exactly what kind of home they can afford.
Michelle Morris is a mortgage professional with Coldwell Banker Home Loans in the San Diego area. She can be reached at Michelle.Morris@mortgagefamily.com or (619) 850-3600.