Is Your Pre-Approval Letter Worthless?

by Alex Stenback on August 19, 2010

Let’s do a little exercise in comparison/contrast, shall we?

 The following is an image clipped from a pe-approval letter I recently received as an attachment to a purchase agreement.  Anonymized for obvious reasons:

Translation: “Based on information that may or may not be either unverifiable or outright fiction, which we’ll only verify completely once you have taken your home off the market, our client is pre-qualified.”  Congratulations indeed.

Confidence inspiring?  No.  Would you be comfortable buying or selling a home based on that letter?  I hope not. 

It clearly states nothing has been verified about this borower. Not income.  Not credit.  Not down payment.  Nothing.   Read closely and it appears the loan application is not yet complete.

 I mean, why bother?  According to that letter, the whole thing is a figment of imagination. So good luck, I guess.

To be fair, this is not the worst pre-approval letter I have seen, and all pre-approval letters have some qualifying language.   After all, Minnesota Statute 58.13 Subdivision 1 (12)says: [No person acting as a loan originator shall] “issue any document indicating conditional qualification or conditional approval for a residential mortgage loan, unless the document also clearly indicates that final qualification or approval is not guaranteed, and may be subject to additional review;”

 But still, surely this lender can do better for their clients, agents, and other interested parties. 

In the interest of full disclosure, and as an example of a strong pre-approval, here’s what I send (in addition to a $10,000 guarantee to the seller that the loan will close):

I’ll close with a rhetorical question: Which letter would you rather have in a competitive situation, or if you are selling your home?

{ 1 comment… read it below or add one }

Laura Morton August 26, 2010 at 11:03 pm

The second letter is obviously better. However, it gives the lender/mortgage broker several ways to back out of the deal. When I sell a house my agent asks to see a mortgage pre-approval that includes the amount that the buyer is approved for. I get a deposit and if the deal still falls apart I keep some of the money. This is disclosed upfront.

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