Common problems with Mortgage Preapproval Letters:
Artificial intelligence (AI) is now initially used by most lenders to screen buyers and it's limitations contribute to home buyer's confusion and max sales price inaccuracies
Many letters lack specific details about the loan terms
Inaccurate information -- loan type not listed, terms of the loan like rate, APR, PITI payment not included or inaccurate
Unrealistic preapproval amounts
Not location or property type specific - a max sales price for a condo will be far less than a single family home without the heavy HOA dues. A property in rural areas will typically have annual home insurance premiums 3-6 times what a urban subdivision home will have
Confusing language or terms including misspelling and bad grammar
Missing important conditions or disclaimers
Not including the loan originator's NMLS ID number and their employing lenders ID number -this is a disclosure violation and a tell tale sign of loan officer incompetence
Prequalification pretending to be a preapproval - verbiage and info indicates its a pre-qual and the loan officer represents the letter as a full pre-approval. Evidence of loan officer incompetence or just being a flat out liar--maybe both.
Getting pre-qualified is fast, simple, and doesn't require any commitment--a preapproval is far more detailed
A pre-qualification for a mortgage is quite simple. You call a lender, or visit their website, and provide some basic information. Things such as your annual income, your current debt payments and funds available are the basics. With this information and a credit report, either a loan officer or a lender's artificial intelligence (AI) system will then provide a home buyer with a ballpark sales price, mortgage amount and loan type that fits with their information. While this may seem promising in theory, it is essentially worthless. No supporting documentation has been submitted and reviewed regarding a buyer's financial status, and the signing loan officer really hasn't done their due diligence or acted professionally.
A preapproval is far more detailed
It requires a loan officer to gather and review a home buyer's financial situation and probe for potential issues. The accuracy of the preapproval is directly related to the loan officer's ability, knowledge, and experience. The preapproval letter will be detailed, indicating the loan officer has put time and energy into the process. It should include full PITI monthly estimated payments using accurate property tax and home insurance numbers based on the sales price and the home buying area.
The number one area many loan officers screw up is
accurately calculating a buyer(s) qualifying income
A preapproval is super easy to complete when a buyer is salaried with a set income every month, one that has changed little over the last 2 years plus. But what about the buyers who don't fall into that category and a loan officer who lacks the ability, knowledge and experience to accurately understand the buyer's income situation? It can sometimes be a mess with underwriting blowing the loan out of the water 2 weeks into a deal.
About 9 in 10 (90%) of loan officers don't truly understand complicated income situations --such as buyers who are self employed, buyers who work jobs with variable hours and with varied rates of hourly pay (RNs and other health workers for example), buyers with income sources that include bonus and overtime, buyers who frequently change jobs and buyers with complex investment income. These are just a few of the various income scenarios that can present accuracy issues if the loan officer is not experienced, knowledgeable and capable.
Over half of buyers are stretching to their limit to buy a home at current sales prices - there is little margin for error
What this means is any miscalculation by the loan officer on the buyer's income, other monthly debts or estimated monthly mortgage payment can present problems with underwriting. I often get requests from an agent to push the preapproved sales price beyond what the initial letter will allow for--and sometimes with a little magic this can be accommodated. Again, the loan officer's ability, knowledge, and experience are vital to a successful, low hassle closing.
Some additional areas a loan officer needs to probe to make sure that buyer is truly qualified
Payment calculations-and payment calculators
Home insurance
Property taxes in California
Accurate credit scores--and special credit circumstances
Student loans and how they affect qualifying
Self employed
property type and location --for example, condos, multi-unit properties and manufactured homes will change max sales price, loan program availability and change buyer funds needed
accurate closing cost calculations making sure the buyer has enough funds to handle the down as well as their share of closing costs
