Mortgage Preapproval Is Harder to Get for Many Borrowers

For many people, an important first step in buying a house is getting a mortgage preapproval.

When properly done, preapproval can speed up the purchase process by providing a rigorous assessment of the maximum amount a buyer can afford to borrow, based on a formal credit check and verification of income and assets.

But prevetting has become more difficult and confusing these days, for borrowers as well as lenders, as a result of lending rules that took effect in January.

The rules from the Department of Housing and Urban Development require lenders to issue a binding good-faith estimate of total closing costs within three days of submission of a formal loan application. The formal application is usually made when a preapproval is written.

Lenders are barred, before issuing this binding estimate, from requesting tax returns, bank statements and the like from a borrower. (In addition to the loan amount, the applicant is asked to provide only a Social Security number, gross monthly income, the value and often the address of the property.)

Many lenders are reluctant to be locked into closing costs amid declining property values, and therefore fewer of them, especially the big banks, are providing preapproval letters for a certain loan amount on a property that often has yet to be formally appraised. The problem is particularly acute for buyers who have not yet decided which property they want.

By not issuing preapprovals — and all the banks are not doing it — the banks are erring on the side of caution because there’s less risk for them.  However, this can be frustrating to Realtors and Home Buyers.

Bank of America, for example, issues preapprovals only after a borrower’s actual loan application has been accepted. The bank instead recommends that borrowers first seek a prequalification, a less rigorous assessment of how much they can afford to borrow based on unverified financial data, though the bank says it sometimes involves a credit check.  In reality the pre-approvals are only as good as the loan officer who issues them.  They are non binding and carry little weight.

Smaller lenders seem to be more flexible.  This may be due to competition.  Smaller lenders want to capture the buyers quickly so they don’t shop around.  Thus they may be quicker to issue the pre-approval in hopes that the borrower will work with them because they offered this service.

Many sellers and real estate agents, meanwhile, still expect mortgage preapprovals.  Nobody wants to have a deal blow apart at the last minute due to an unqualified buyer.

Some listing agents won’t even consider recommending potential bidders to sellers who are not recently preapproved, and generally won’t accept the quicker prequalification letter as a substitute either.

Agents embrace preapprovals because they allow them to show they have a real buyer who’s already started the process.  At the peak of the housing market, lenders were more than happy to provide preapproval letters.  This was also primarily due to the fact that many loans were made based on the borrowers credit score as the major factor.

Mortgage experts say that borrowers should ask lenders, early on, exactly what their preapproval process entails, and push for a preapproval — not prequalification — especially if the lender is running a credit check for a prequalification.

Buyers working with a broker should also ask which lenders the broker knows are issuing which kinds of letters, and whether having just a prequalification will affect their chances of putting in a winning bid on a property.