No More Pre-approval Letters, Say Lenders

As a result of the new mortgage borrower protections that took effect January 1st, some lenders are now saying they can no longer provide pre-approval letters.

“Before writing the letters, lenders like to see proof of income, such as a pay stub or tax return. But under the Real Estate Settlement Procedures Act rule that took effect Jan. 1, lenders may not require such documents before giving the borrower a good-faith estimate of closing costs.

“Since lenders are now being held to those estimates, they want to hold off on issuing them as long as possible. So some lenders are reconsidering or backing away from preapprovals. Without them lenders could end up wasting time on loan applications that fall out.” (See: Respa Rule Has Lenders Balking on Preapprovals, US Banker, March 2010)

No one has ever believed that a pre-approval or pre-qualification letter is a loan commitment of any kind because at the time the letter is provided the value of the property is unknown and the borrower has not submitted all required documentation. Moreover, requiring documentation to obtain a pre-approval or pre-qualification letter has certainly not been a concern for lenders who have offered low-doc and no-doc loan applications.

“In too many cases,” I wrote in 1999, “lenders provide nothing more than a glorified hand-holding letter when applicants seek preapproval. The usual letter isn’t an absolute loan commitment, because it typically contains language allowing the lender to again check credit and consider the property’s appraisal and survey before proceeding.” (See: Closing fast, It Could Happen, REALTOR magazine, November 1, 1999)

A Good Faith Estimate, on the other hand, IS a commitment from a lender. The new forms developed by HUD and required as of the first of January actually show the real costs of getting a loan.

If Lender Smith will not give you a pre-approval or pre-qualification letter, go elsewhere. You can bet that Lender Jones will want your business.

And Lender Wilson and Lender Johnson, etc., etc., etc.

Tweet This Post

Technorati Tags: good faith estimate, hand-holding, letter, pre-approval, pre-qualification