How to spot a bad pre-approval letter

Bad Mortgage Pre-Approval Letters — How to Spot Them Before They Kill Your Deal

A bad mortgage pre-approval letter can cost a buyer their dream home and a real estate agent weeks of wasted time.

Not all pre-approval letters are created equal. Some are based on little more than a quick online questionnaire, while others involve a detailed review of the buyer's financial situation by an experienced loan officer.

Knowing the difference can help agents avoid financing surprises, underwriting problems, delayed closings, and canceled transactions.

What to Know

1. Common problems with mortgage pre-approval letters — Missing loan details, inaccurate qualifying amounts, unrealistic payments, and questionable information are warning signs.

2. Pre-qualification is not the same as pre-approval — Getting pre-qualified is fast and simple, but it doesn't mean the buyer has been thoroughly reviewed.

3. A real pre-approval is far more detailed — An experienced loan officer reviews the buyer's financial situation, documentation, and potential qualifying issues.

4. Calculating qualifying income is where many loan officers make mistakes — Self-employment, overtime, bonuses, variable hours, and multiple income sources can create serious problems.

5. Many buyers are stretching their qualifying limits — Small errors in income, debt, property taxes, or insurance can derail a transaction.

6. Property type and location affect qualifying — Condos, manufactured homes, rural properties, and other property types can significantly change the numbers.

7. An experienced loan officer needs to investigate potential problems upfront — Credit, student loans, closing costs, property expenses, and other details need careful review.

1. Common Problems With Mortgage Pre-Approval Letters

Artificial intelligence (AI) is now used by many lenders to initially screen home buyers. Its limitations can contribute to buyer confusion and inaccurate maximum purchase prices.

Many pre-approval letters lack specific details about the loan terms.

Here are some common problems:

• Inaccurate or missing information, including loan type, interest rate, APR, and estimated PITI payment.
• Unrealistic pre-approval amounts that may not hold up during underwriting.
• Letters that aren't specific to the property type or location.
• Confusing language, misspellings, and poor grammar.
• Missing important conditions or disclaimers.
• Missing loan originator and employing lender NMLS identification numbers, where required.
• Pre-qualification letters being represented as full pre-approvals when the supporting documentation hasn't been reviewed.

A letter with inaccurate information or missing disclosures should raise questions about the loan officer's attention to detail and competence.

For agents: Don't assume a buyer is fully approved simply because a lender has issued a letter stating a maximum purchase price.  That pre-approval is only as good as the loan officer behind it!

2. Getting Pre-Qualified Is Fast, Simple, and Doesn't Require Any Commitment

A mortgage pre-qualification is quite simple.

A buyer calls a lender or visits a website and provides some basic information, such as annual income, current monthly debt payments, and available funds.

With this information and a credit report, either a loan officer or a lender's AI system can provide the buyer with a ballpark purchase price, mortgage amount, and loan program.

While this may seem promising, a basic pre-qualification has limited value if no supporting financial documentation has been submitted and reviewed.

The loan officer may not have completed the due diligence necessary to determine whether the buyer can actually qualify.

A pre-qualification is a starting point, not a guarantee that the buyer can obtain financing.

3. A Real Pre-Approval Is Far More Detailed

A proper pre-approval requires the loan officer to gather and review the buyer's financial information and investigate potential problems.

The accuracy of the pre-approval is directly related to the loan officer's knowledge, experience, and ability.

A thorough pre-approval should be supported by a review of the buyer's income, assets, credit, debts, and applicable loan program requirements.

The pre-approval letter should provide useful details about the financing and any significant conditions.

The loan officer should also calculate a realistic estimated monthly PITI payment using accurate property tax and homeowner's insurance estimates based on the purchase price and geographic area.

A buyer purchasing a home in a rural area may have significantly higher insurance costs than a buyer purchasing a similar-priced home in an urban subdivision.

Those differences matter when determining the buyer's maximum qualifying purchase price.

For agents: A detailed pre-approval from a knowledgeable loan officer can be far more valuable than a generic letter generated by an automated system.

4. The Number One Area Many Loan Officers Get Wrong Is Calculating Qualifying Income

A pre-approval can be relatively simple when the buyer earns a fixed salary that has changed very little over the previous two years.

But what about buyers who don't fit that category?

What happens when the loan officer lacks the knowledge and experience to accurately evaluate a complicated income situation?

It can turn into a mess, with underwriting rejecting the loan two weeks into the transaction.

Many loan officers struggle with more complicated income situations, including:

• Self-employed buyers.
• Buyers who work variable hours.
• Buyers earning different hourly pay rates, such as registered nurses and other healthcare workers.
• Buyers receiving overtime or bonus income.
• Buyers who frequently change jobs.
• Buyers with complicated investment or multiple income sources.

These are just a few examples of income scenarios that can create serious qualifying problems when the loan officer doesn't understand the applicable underwriting guidelines.

The income shown on a buyer's pay stub or tax return isn't necessarily the income a lender can use for qualifying.

For agents: When your buyer has anything other than straightforward salaried income, the experience and competence of the loan officer become especially important.

5. Many Buyers Are Stretching Their Qualifying Limits — There's Little Margin for Error

With today's home prices and mortgage payments, many buyers are pushing close to their maximum qualifying purchase price.

This means that even a relatively small miscalculation involving income, monthly debts, property taxes, homeowner's insurance, or the estimated mortgage payment can create major underwriting problems.

I often receive requests from agents asking whether a buyer can qualify for a purchase price higher than the amount shown on the initial pre-approval letter.

Sometimes, with additional analysis and the right loan structure, that higher purchase price can be accommodated.

But it takes a loan officer who understands the guidelines and knows how to properly evaluate the buyer's financial situation.

The loan officer's knowledge, ability, and experience can make the difference between a smooth closing and a transaction that falls apart.

For agents: When a buyer is close to their qualifying limit, accurate numbers upfront are critical. There may be very little room for unexpected expenses or qualifying adjustments.

6. Property Type and Location Can Significantly Change the Maximum Purchase Price

A pre-approval amount isn't necessarily valid for every property a buyer might consider.

Property type, location, insurance costs, property taxes, and HOA dues can all affect the maximum qualifying price.

For example:

• Condominiums: HOA dues increase the buyer's monthly housing expense and may reduce the maximum qualifying purchase price compared with a single-family home.

• Rural properties: Homeowner's insurance premiums can be substantially higher than those for comparable homes in urban subdivisions.

• Manufactured homes: Loan program availability, down payment requirements, and property eligibility can differ significantly.

• Multi-unit properties: Financing guidelines, down payment requirements, and qualifying calculations may differ from those for a single-family home.

• California property taxes: The estimated tax payment needs to reflect the property's anticipated assessed value following the purchase, not simply the seller's current tax bill.

A buyer who qualifies for a $600,000 single-family home with no HOA dues may not qualify for a $600,000 condo with substantial monthly HOA dues.

The property-specific numbers need to be evaluated before the buyer assumes the original pre-approval amount still applies.

7. Additional Areas a Loan Officer Needs to Investigate to Make Sure the Buyer Is Truly Qualified

An experienced loan officer needs to look beyond the obvious numbers and investigate other potential qualifying issues.

Some important areas include:

• Mortgage payment calculations: Making sure principal, interest, property taxes, insurance, mortgage insurance, and HOA dues are estimated accurately.

• Homeowner's insurance: Verifying that realistic insurance premiums have been used, especially in higher-risk California areas.

• California property taxes: Properly calculating property taxes based on the anticipated purchase price and applicable assessments.

• Credit scores and special credit circumstances: Understanding credit report details, qualifying scores, disputed accounts, and other potential issues.

• Student loans: Correctly calculating the monthly debt obligation under the applicable loan program guidelines.

• Self-employment income: Reviewing tax returns and other required financial documentation to determine usable qualifying income.

• Property type and location: Identifying whether condos, manufactured homes, multi-unit properties, or rural properties create additional financing requirements.

• Closing costs and available funds: Making sure the buyer has enough verified funds for both the down payment and their share of closing costs.

Missing just one of these details can cause a buyer's qualifying numbers to change during underwriting.

The time to discover these problems is before the buyer makes an offer, not after the transaction is in escrow.

The Bottom Line for Real Estate Agents

A pre-approval letter is only as reliable as the work performed by the loan officer who issued it.

An impressive-looking letter doesn't mean much if the buyer's income hasn't been calculated correctly, the property expenses are unrealistic, or important underwriting issues haven't been investigated.

A knowledgeable, experienced loan officer can identify potential problems before they become deal killers.

A good pre-approval helps protect your transaction. A bad one can put the entire deal at risk.

Need a Second Opinion on a Buyer's Pre-Approval?

With more than 36 years of home loan experience and over 10,000 loans closed, I've seen just about every qualifying situation imaginable.

If you have a buyer with a questionable pre-approval, complicated income, tight qualifying ratios, or a property that presents financing challenges, I'm happy to take a second look.

Let's catch potential problems before they become your problem!

Dennis Hughes
Lend4less.com — Rock Bottom Rates!
Serving California home buyers and real estate agents.