A preapproval is the next step after becoming prequalifed. Essentially, this means that you are supplying all of the documentation that is required to support your loan scenario. Everything you have told the Loan Originator needs to be backed up for a “full doc
20 thoughts on “Are you really preapproved or are you just prequalifed for a mortgage? Part 2”
Hi Rhonda,
Thanks for providing this two-part series, which delves into an important topic for today’s market.
Question: Can a broker write a pre-approval letter or must a broker receive “pre-approval” from the lender?
Lender is defined as the entity funding the loan.
I know that your company has a correspondent line of credit with lenders.
So, for example, when you are brokering a loan outside of your correspondent credit line, can you provide this pre-approval letter or are you, as an LO, providing the client (who will be showing this to the real estate agents) with the pre-approval letter or does it come from the lender?
I Jillayne, when I broker a loan it means it’s not a conforming (Fannie Mae/Freddie Mac) product and I do not issue a preapproval until I have one from the lender. The last thing I want is to have a buyer with an offer on a home only to find out that even though I thought they should be approved, the lender did not.
As far as what LOs who work for a Mortgage Broker and not a Correspondent Lender or Bank, I suppose it depends on what their company policy is. They would still be able to use AUS (automated underwriting) and they may just go off of that which works most of the time.
During these times, I want to provide as much assurance as possible to buyers that they do have an approved loan.
This is off-topic, but I don’t see a better place to pose a question about our local real-estate market:
Are the number of Puget Sound deals that fall through after the offer is accepted pretty much the same today as they have been for the last several years? I have heard about how people sometimes lose financing at the last minute, and there have also been stories about people who just plain get cold feet and decide to walk away from deposits because they think they can get a better deal.
Maybe such failed deals are just phenomena of other parts of the country and haven’t found their way to the Puget Sound in any appreciable way. But I was just curious whether any of the local professionals have seen changes in the deal completion rates this fall.
Sniglet,
Yes, as the subprime markets were crashing and other programs going away, borrowers were losing their loans. The biggest concerns for the Sellers was “will the deal close”. Frankly, I didn’t see buyers walking away from deals simply because of cold feet.
I’m not seeing very many deals currently dying because of loan programs right now. The exotic, risky programs are pretty much gone. I have talked to 3 different LO’s today that reported that their loan reps are selling money again. It seems some programs are starting to come back. Rhonda, what are you hearing?
It’s very important for all parties to be diligent, which is why Rhonda’s article is timely and important.
When you say you aren’t seeing zero down offers, are you infering that this is different from recent years or is this pretty much just consistent with what you have experienced in 2005 and 2006?
What I am seeing is not consistent with anything I have seen since I arrived in the Seattle Area in February of 2004. It’s hard to “take the pulse” of the market in fall and winter before early January in any year. But I’m clearly seeing more FHA than ever, and most sellers and agents would be hard pressed without a very strong pre-approval from a very trusted lender to take a zero down offer right now.
I did a run down of financing on closings about two or three posts ago. Not feeling well tonight or I’d go find the link on that. As I recall I saw very few 2nd mortgages used in financing, clearly a dramatic change. I will do a comparison on a YOY basis of some subsegments of various markets including points South, tomorrow if I feel better.
I checked around Microsoft a few days ago and was amazed at the number of lower priced condos on market. Clearly a considerable difference from what I saw early this year. Though some were insanely priced. I saw a one bedroom condo whose high was $175ish trying to sell for almost $220,000! We’re talking about condos that jumped from $100,000 to $175,000 between 6/05 and 1/07 and someone’s thinking they can get $220,000?!?
Someone’s not reading the paper…or blogs. If that one sells, I’d have to say that is a HUGE bubble. But my gut says there ain’t a chance in hell.
I’m just getting back from a late dinner…I’ll respond tomorrow…sorry I wasn’t around to address your comments. Zero down conforming is around. More to follow.
laxtosnoco, typically with a purchase, once you have a signed around purchase and sales agreement (so you know your closing date) you can lock in your rate. With a refinance, the rate can be locked in at application once you know your what your loan program will be.
When to lock is up to the borrower. I prefer locking sooner than later if the borrower is happy with the rate. I’m not a gambler and in this market, locking in rates and having loans fully approved can save a borrower a lot of grief if the program is being discontinued or the underwriting guideline has been modifed.
Greg, I agree. Knock on wood, I have not had any transactions not close at the last minute from cold feet or lack of programs. This is why the preapproval process is so important. Helping the buyer understand their mortgage, hopefully allowing them to feel more at ease with the home buying process. Should a program change while in transaction (and the lock/approval does not protect you) a lender will have more knowledge of the buyer and the ability to respond quickly. With that said, it does seem to be a bit calmer now in the mortgage world. I’m not getting all of the guideline changes and no more of this or that program.
Thanks for the information about the rate lock on your blog. It was a very clear explanation, but I wanted to get into a little more detail. As I understand it, you’re recommending the following:
Step 1.) Get pre-approved for a mortgage, ideally with AUS findings (or manual underwrite for more special circumstances). Assuming I’m shopping around, I should be able to compare GFE’s from several reputable lenders/brokers.
Step 2.) Identify property to purchase and get an accepted purchase agreement.
Step 3.) Call up loan officer, provide purchase agreement and request a rate lock in writing (assumes escrow closes within 30 days). I probably should not pay a premium for a 30 day lock period.
Step 4.) Close the loan, get final settlement statement/HUD-1 and hope for no surprises at closing table.
Does this sound right?
One final question: your blog article gave the example of a 15 day lock that was priced 125 basis points lower than par pricing. If I’m well into my escrow period, and rates haven’t changed can I ‘unlock’ my 30 day rate, and capture the 125 basis point premium?
With Step 1) make sure the reputable brokers will guarantee their closing costs as shown in section 800 of the GFE.
Step 3.5) tell your LO that you would like to review your HUD 24 biz. hours prior to your signing appointment. This is when you can match up your GFE to the HUD and contact the LO if there are errors.
Step 3.75) at the signing appointment, don’t hesitate to contact the LO if there are errors or issues that you discover.
The answer to your final question: you cannot “unlock” rates. You can opt for a “float down” at the time of locking in your interest rate. Rates with a float down feature are often slightly higher than the going rate.
Rates are priced at the time of locking. The example that I gave on my blog is based on the same rate with different lengths of time.
It could be at 30 days prior to closing, assuming you locked, that rates are slightly higher than when you locked.
Also, it’s 0.125 basis points in my example. 😉 The example is not a hard and fast rule for pricing. That’s just what it was back when I wrote that post with one of the lenders we work with.
Did a little checking, and from a Sale Failed standpoint, there does not seem to be a change, based on some data.
In the MLS we can’t easily track why properties come back on market that are STI or pending. But there is a “sale fail release” status.
In 2005 there were 555 sales failed and released in King County. In 2006 there were 456 and YTD there are 417. Doesn’t seem like a strong trend of it being worse in 2007 so far. We’ll see where it lands by year end, butt looks like likely more than in 2006, but not necessarily more than in 2005.
This year Auburn had 42 of those with 743 sold. Kent had 43 with 998 sold. Bellevue had 38 with 1,195 sold and Seattle had 100 with 6,478 sold. Federal Way had 22 with 704 sold. That is counting both residentail and condo sales.
To check zero downs agains sales with money down, I have to peek inside each and every sale. Much more tedious. I’ll try to do that with these same subsegments at the end of October. I can’t do all of Seattle. But I’ll hit the other segments and see if sale failed and zero down has similar proportions per city using sold in October as the guide.
Hi Linda, there may be float down options for your interest rate. Typically if you have a float down, the interest rate of fee may be higher than not having the “float down” option.
Typically, you cannot “unlock” a locked mortgage. Your LO may be able to break the lock and lock with another bank if they work for a mortgage broker or correspondent lender. Many LOs prefer not to to do this as it burns our relationships with the lender. I will re-lock a loan if rates have changed significantly but I limit it to one time during the transaction. No LO wants to lose a loan they’ve invested their time with. LOs are not paid unless the loan closes. Which I know you’re not asking about nor may you care.
A rate lock is a commitment to the lender and there may be repercussions to the originating mortgage company if they have a high volume of fallout (loans that have been locked but not “delivered”).
Hi Rhonda,
Thanks for providing this two-part series, which delves into an important topic for today’s market.
Question: Can a broker write a pre-approval letter or must a broker receive “pre-approval” from the lender?
Lender is defined as the entity funding the loan.
I know that your company has a correspondent line of credit with lenders.
So, for example, when you are brokering a loan outside of your correspondent credit line, can you provide this pre-approval letter or are you, as an LO, providing the client (who will be showing this to the real estate agents) with the pre-approval letter or does it come from the lender?
Thanks.
I Jillayne, when I broker a loan it means it’s not a conforming (Fannie Mae/Freddie Mac) product and I do not issue a preapproval until I have one from the lender. The last thing I want is to have a buyer with an offer on a home only to find out that even though I thought they should be approved, the lender did not.
As far as what LOs who work for a Mortgage Broker and not a Correspondent Lender or Bank, I suppose it depends on what their company policy is. They would still be able to use AUS (automated underwriting) and they may just go off of that which works most of the time.
During these times, I want to provide as much assurance as possible to buyers that they do have an approved loan.
Rhonda,
At what stage do you lock the interest rate with potential borrowers?
This is off-topic, but I don’t see a better place to pose a question about our local real-estate market:
Are the number of Puget Sound deals that fall through after the offer is accepted pretty much the same today as they have been for the last several years? I have heard about how people sometimes lose financing at the last minute, and there have also been stories about people who just plain get cold feet and decide to walk away from deposits because they think they can get a better deal.
Maybe such failed deals are just phenomena of other parts of the country and haven’t found their way to the Puget Sound in any appreciable way. But I was just curious whether any of the local professionals have seen changes in the deal completion rates this fall.
Sniglet,
Yes, as the subprime markets were crashing and other programs going away, borrowers were losing their loans. The biggest concerns for the Sellers was “will the deal close”. Frankly, I didn’t see buyers walking away from deals simply because of cold feet.
I’m not seeing very many deals currently dying because of loan programs right now. The exotic, risky programs are pretty much gone. I have talked to 3 different LO’s today that reported that their loan reps are selling money again. It seems some programs are starting to come back. Rhonda, what are you hearing?
It’s very important for all parties to be diligent, which is why Rhonda’s article is timely and important.
I’m not seeing zero down offers. Mostly 5% or 10% conventional or FHA.
Ardell,
When you say you aren’t seeing zero down offers, are you infering that this is different from recent years or is this pretty much just consistent with what you have experienced in 2005 and 2006?
Sniglet,
What I am seeing is not consistent with anything I have seen since I arrived in the Seattle Area in February of 2004. It’s hard to “take the pulse” of the market in fall and winter before early January in any year. But I’m clearly seeing more FHA than ever, and most sellers and agents would be hard pressed without a very strong pre-approval from a very trusted lender to take a zero down offer right now.
I did a run down of financing on closings about two or three posts ago. Not feeling well tonight or I’d go find the link on that. As I recall I saw very few 2nd mortgages used in financing, clearly a dramatic change. I will do a comparison on a YOY basis of some subsegments of various markets including points South, tomorrow if I feel better.
I checked around Microsoft a few days ago and was amazed at the number of lower priced condos on market. Clearly a considerable difference from what I saw early this year. Though some were insanely priced. I saw a one bedroom condo whose high was $175ish trying to sell for almost $220,000! We’re talking about condos that jumped from $100,000 to $175,000 between 6/05 and 1/07 and someone’s thinking they can get $220,000?!?
Someone’s not reading the paper…or blogs. If that one sells, I’d have to say that is a HUGE bubble. But my gut says there ain’t a chance in hell.
I’m just getting back from a late dinner…I’ll respond tomorrow…sorry I wasn’t around to address your comments. Zero down conforming is around. More to follow.
laxtosnoco, typically with a purchase, once you have a signed around purchase and sales agreement (so you know your closing date) you can lock in your rate. With a refinance, the rate can be locked in at application once you know your what your loan program will be.
When to lock is up to the borrower. I prefer locking sooner than later if the borrower is happy with the rate. I’m not a gambler and in this market, locking in rates and having loans fully approved can save a borrower a lot of grief if the program is being discontinued or the underwriting guideline has been modifed.
For more info on locking, you can check out a post I did earlier here.
Greg, I agree. Knock on wood, I have not had any transactions not close at the last minute from cold feet or lack of programs. This is why the preapproval process is so important. Helping the buyer understand their mortgage, hopefully allowing them to feel more at ease with the home buying process. Should a program change while in transaction (and the lock/approval does not protect you) a lender will have more knowledge of the buyer and the ability to respond quickly. With that said, it does seem to be a bit calmer now in the mortgage world. I’m not getting all of the guideline changes and no more of this or that program.
Rhonda,
Thanks for the information about the rate lock on your blog. It was a very clear explanation, but I wanted to get into a little more detail. As I understand it, you’re recommending the following:
Step 1.) Get pre-approved for a mortgage, ideally with AUS findings (or manual underwrite for more special circumstances). Assuming I’m shopping around, I should be able to compare GFE’s from several reputable lenders/brokers.
Step 2.) Identify property to purchase and get an accepted purchase agreement.
Step 3.) Call up loan officer, provide purchase agreement and request a rate lock in writing (assumes escrow closes within 30 days). I probably should not pay a premium for a 30 day lock period.
Step 4.) Close the loan, get final settlement statement/HUD-1 and hope for no surprises at closing table.
Does this sound right?
One final question: your blog article gave the example of a 15 day lock that was priced 125 basis points lower than par pricing. If I’m well into my escrow period, and rates haven’t changed can I ‘unlock’ my 30 day rate, and capture the 125 basis point premium?
Thanks,
LAXTOSNOCO
LAXTOSNOCO,
With Step 1) make sure the reputable brokers will guarantee their closing costs as shown in section 800 of the GFE.
Step 3.5) tell your LO that you would like to review your HUD 24 biz. hours prior to your signing appointment. This is when you can match up your GFE to the HUD and contact the LO if there are errors.
Step 3.75) at the signing appointment, don’t hesitate to contact the LO if there are errors or issues that you discover.
The answer to your final question: you cannot “unlock” rates. You can opt for a “float down” at the time of locking in your interest rate. Rates with a float down feature are often slightly higher than the going rate.
Rates are priced at the time of locking. The example that I gave on my blog is based on the same rate with different lengths of time.
It could be at 30 days prior to closing, assuming you locked, that rates are slightly higher than when you locked.
Also, it’s 0.125 basis points in my example. 😉 The example is not a hard and fast rule for pricing. That’s just what it was back when I wrote that post with one of the lenders we work with.
Sniglet,
Did a little checking, and from a Sale Failed standpoint, there does not seem to be a change, based on some data.
In the MLS we can’t easily track why properties come back on market that are STI or pending. But there is a “sale fail release” status.
In 2005 there were 555 sales failed and released in King County. In 2006 there were 456 and YTD there are 417. Doesn’t seem like a strong trend of it being worse in 2007 so far. We’ll see where it lands by year end, butt looks like likely more than in 2006, but not necessarily more than in 2005.
This year Auburn had 42 of those with 743 sold. Kent had 43 with 998 sold. Bellevue had 38 with 1,195 sold and Seattle had 100 with 6,478 sold. Federal Way had 22 with 704 sold. That is counting both residentail and condo sales.
To check zero downs agains sales with money down, I have to peek inside each and every sale. Much more tedious. I’ll try to do that with these same subsegments at the end of October. I can’t do all of Seattle. But I’ll hit the other segments and see if sale failed and zero down has similar proportions per city using sold in October as the guide.
Thanks for the response Rhonda.
laxtosnoco, you bet! 🙂
can you unlock from a mortage rate you lock in on for a now lower rate before closing or can I change banks and start over again to get a lower rate?
Hi Linda, there may be float down options for your interest rate. Typically if you have a float down, the interest rate of fee may be higher than not having the “float down” option.
Typically, you cannot “unlock” a locked mortgage. Your LO may be able to break the lock and lock with another bank if they work for a mortgage broker or correspondent lender. Many LOs prefer not to to do this as it burns our relationships with the lender. I will re-lock a loan if rates have changed significantly but I limit it to one time during the transaction. No LO wants to lose a loan they’ve invested their time with. LOs are not paid unless the loan closes. Which I know you’re not asking about nor may you care.
A rate lock is a commitment to the lender and there may be repercussions to the originating mortgage company if they have a high volume of fallout (loans that have been locked but not “delivered”).
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