From Stephen King To Shakespeare
The Loan Plot Thickens
We have all heard the tales. Sometimes they take the form of a horror story. Occasionally a bitter tragedy, complete with a cast of victims and villains worthy of a Shakespeare play. Yet it does happen that real estate deals do fall apart minutes before the stroke of midnight.
Often it is the loan that falls apart and the lender is identified as the scoundrel. When this happens it truly can result in a difficult situation for all involved, but as a lender I know that 99 percent of these situations can be avoided with the proper understanding of the groundwork – which should be laid upfront.
As a lender I am often asked to provide a “lender letter” for my clients stating that my borrower is qualified to get the loan necessary to complete the purchase of a property. The seller needs to be able to compare and evaluate the competing offers to buy their property.
The situation is identical for selling both primary residences and investment properties. This is a prudent and rational step, however the seeds of tragedy are sown when it is requested too early in the process.
In today’s Denver housing market properties are flying off the shelf in record time. Under this pressure it is tempting to take short cuts along the way. Especially in the early hours, after the borrower has made the decision to purchase. At this stage emotions are high. The potential buyer is then told by their Realtor that a “lender letter” is needed before they can start looking. And oh, by the way, today is Thursday and they want to go out and look at houses this weekend.
The problem that often arises at this point is the confusion between the different types of “lender letters.” It is useful to apply the distinction between an opinion and a declaration when differentiating between a Pre-Qualification Letter” and a “Pre-Approval Letter.”
Back to our example. So a lender is identified, called and after a few minutes on the phone an opinion can be expressed. In today’s high-tech world a full credit report can be pulled in five minutes. Verbal information regarding employment type, annual income and assets for downpayment can be gathered quickly and plugged into a software program.
This information can then be submitted via the internet to official underwriting sites that can evaluate the loan.
After submitting, in less than a minute a decision is generated. This approval is conditional since it requires the proper documentation and validation of all the information in the application. It says, in effect, “You will be approved for this loan if you can prove everything you have claimed.”
It also gives a list of the actual documents that will be accepted as the necessary proofs. Examples are such items as paystubs, W2s, tax returns and bank statements.
This is the point when many “lender letters” are sent out. At this stage, the “Pre-Qualification Letter” can be generated, but it is just an opinion. The information has not been validated. No application may have yet been completed and no documentation obtained.
It is a necessary starting point given the business of all of our lives, but wise lenders, Realtors and borrowers will realize that the loan is not necessarily a sure thing yet.
Because it is needed to submit with a contract, a request for a “Lender Letter” can happen too soon, if the lender has not been able to verify the borrower’s information. An example could be a self-employed borrower’s statement of earnings. Sometime the borrower’s tax returns could show a lower income as a result of deductions and business expenses.
It is important therefore for all to understand the limited scope of the Pre-Qualification opinion and not be lulled into a false sense of security.
A safer course is to push on immediately and obtain the safety of the declaration of a “Pre-Approval Letter.” This involves the borrower’s completing a written application, supplying all of the required documentation and the loan officer reviewing it before passing it on to underwriting.
With a Pre-Approval declaration in hand, all parties know the loan amount that the barrower can obtain, usually the terms of the loan and the interest rate.
Getting to this stage in the process as quickly as possible is the key to avoiding unhappy endings!
Neil Funsch has been a mortgage broker for 18 years, the last four in Park Hill. He can be reached at 303-229-2684 or neil.funsch@gmail.com.