This article is written for you so you avoid a common problem that can cost you thousands if not tens of thousands of dollars. Even I, an experienced investor who has been around buying and selling properties for 12+ years, recently fell for this one.
It involves the “pre-approval” letter that mortgage brokers sometimes write for their clients.
You see, there has been a practice among unscrupulous mortgage brokers to write a pre-approval letter for their Real Estate Broker friend/client who refers a buyer to them. This is done so the mortgage broker can get the business down the road. They are more concerned in many cases with locking in the buyer to go with them than checking all the facts about their qualifications. They know if they refuse to write the letter, they will just go to one of the thousands of other mortgage people out there.
A pre-approval letter should be just that: an approval before a deal is done, based on the mortgage broker’s actual review of the potential buyer’s income and credit.
Unfortunately, many mortgage brokers just write the letter for their real estate broker friend/client as a favor to refer the business, and only ask verbally about their income and give a cursory credit check. The mortgage broker who actually reviews income documentation on the buyer are few and far between, in my experience.
Well, knowing this, you would think that I would avoid this problem but guess what? Accepting the pre-approval letter of a mortgage broker recently cost me time, energy and potentially tens of thousands of dollars.
Since I was very busy, I went along with accepting the pre-approval letter at the buyer’s real estate agent’s insistence. She was in the business for 15+ years and assured me it was ok. Yet, it took a FULL 2 MONTHS for them to figure out that the buyer did not have enough income.
By this time, the summer was far over, the good selling season was finished and I was stuck with the apartment and back at square one. If I sell now, I will probably get at least 5-10% less, costing me tens of thousands of dollars.
So learn from my mistake.
Do not accept a pre-approval letter unless it states the following:
1. The actual credit score of the borrower.
2. The minimum monthly payments that the borrower is responsible for as indicated on the credit report. Also the letter should acknowledge the monthly common charges/maintenance/property taxes/insurance that the buyer must pay and all other monthly charges along with their income was looked at in determining the amount the buyer could borrow.
3. The current gross income as indicated on the paystubs, and the previous years W2 amount should be stated.
Many real estate industry people will feel this is overkill and not necessary. Many mortgage brokers will resist writing this information down because it takes extra work.
But, even though your mortgage broker will think this is not necessary, the fact is that the pre-approval letter is completely worthless if it doesn’t state this information. Don’t be mistaken, the letter means nothing.
Be your own judge. If you trust that the mortgage broker is reputable and will do right by you and you want to accept a watered-down pre-approval letter, just remember you were warned.
The mortgage broker I dealt with lied to me repeatedly and told me that they were waiting on Coop approval only and the borrower was approved (In a coop sale, the building financials and other information must be approved as well as the buyers qualifications). This turned out to be false.
I know this is harsh but the mortgage broker works at a supposedly “reputable firm”. In fact the mortgage agent was apparently “one of the top people in the firm”.
I just want you to realize that even when everything looks good – the real estate broker is experienced, the mortgage broker works at a “reputable firm” – the fact is the pre-approval letter is not worth the paper on which it is written.
I suggested that they just prove to me that they reviewed the credit and income prior to writing the pre-approval letter and I would be satisfied. But, they never got back to me.
Before all of this, when the broker originally delivered the bad news to me, she actually blamed the mistake on the changing banks underwriting standards. But, this is a flimsy excuse because in the end, my buyer qualified for only 80% of what the pre-approval letter stated, which was too far off not to be noticed. Banks may be changing some requirements but the basic income to debt ratios used by banks is pretty much the same (as it was already cut back last year when things were getting bad for the banks).
The fact is that the mortgage broker, even if they wrote a phony pre-approval letter, should have been able to tell the first day they got all the documents and application submitted from the borrower if they borrower had enough income.
The way the business works is that the mortgage broker submits the borrowers information into the computer and the bank will issue an approval letter subject to further review of the documents.
What probably happened in my case is the mortgage broker never looked through the docs thoroughly, and just entered the information she was told by the real estate broker on what the borrower earned. She got her approval letter subject to review, and then the docs were sent in. Only then did the bank realize the income didn’t qualify and because the banks are so screwed up these days and the fact that the mortgage broker was not on the ball, the process took 2 whole months to figure out that the borrower didn’t qualify. Welcome to the world of real estate. This is why people don’t like mortgage brokers.
So the lesson here is to require that the mortgage broker prove they reviewed the documents by having them put in writing the above mentioned points and don’t give into overly pushy real estate brokers. I will try to follow my own advice next time too.