Pre-Approval Push-Pull

Many buyers entering the home-shopping market are surprised when their Realtor tells them they have to go get a “pre-approval letter” from a mortgage lender.

There are a few markets left in the U.S. where the seller is delighted to hear from a buyer, any buyer, even a poorly-qualified one (Buffalo, NY, I’ve heard); but most places, sellers are drunk with power, and demand a financial undressing by any buyer intending to make an offer.

Naturally, most buyers would rather undress in private, in a mortgage lender’s office, and have the banker describe the scene in professional language, omitting unsightly but irrelevant details.

A pre-approval letter is supposed to tell the seller that the buyer can do what the buyer intends to do. That is, the buyer is all-but-guaranteed to be approved for the loan described in the contract. Pre-approval letters can be anything from a single sentence to pages of lender CYA. Simplicity ends right there.

From a simple beginning, efforts to procure and present pre-qualification letters often deteriorate into ambiguity, invasion of privacy, and bad feeling between the parties of a real estate transaction.

Most people seem to understand that a pre-approval letter is not a formal approval, or commitment to lend. However, Realtors and sellers who have been burned in dealings with pre-approved but ultimately un-closeable buyers want to push the limits of the process.

The first push to the limit involves credit. Many Realtors and sellers want to know that a credit check has been run on the buyer, and often demand to know the details. However, it is a Federal crime to disclose credit information to anyone. In the new era of credit scores (the semi-notorious “FICOs”), we can use an adjective, like “high”, but seller desires for more intimate information should remain frustrated.

Law aside, the more pedestrian problem with the demand for a credit check is that initial, “in file” reports (of the kind used to make car loans) are notoriously inaccurate. These reports too often omit some crash landing not held in electronic record, and found in a courthouse somewhere after a ten-day search. Late-appearing crash landings can include foreclosures, bankruptcies, old divorces commanding payments to exes, and a long list of horrors with the IRS and State departments of revenue.

Other agents and sellers roasted in the past want a disclosure of the rest of the buyer’s financial life: salary, work history, savings, debt, marital status, and so on. This information is protected by law, also, and disclosure without permission is verboten.

The modern era of underwriting by computer is a help here, as well: lenders now can achieve a fairly reliable approval at either Fannie’s or Freddie’s website, formal documentation and property to be attached later.

The greatest vulnerability to the buyer happens after all the credit, asset, and employment history has been established: what will the pre-approval letter say?

Many lenders try to help the buyer’s offer gain acceptance by indicating great financial strength, but that effort can encourage a seller to insist on a high price. If you have just disclosed excess purchasing power, your agent can hardly insist that “this is as high as they can go.”

So, many experienced Realtors ask the lender to write a pre-approval corresponding to a specific price, trying to head off a higher counter-proposal from the seller. However, on a typical home-search weekend in a hot market, the last thing Realtor and buyer want is to be confined by a too-low price in a pre-approval letter.

Some Realtors ask for a sheaf of pre-approval letters at ascending prices, to cover any eventuality. Even this tactic can run aground in an exchange of offer, counter, and re-counter. I have heard this exasperated listing agent voice on the phone: “Your first letter, this morning, said $210,000; this afternoon it’s $215,000…. Lou, which is it?”

It is risky for a lender to use the following approach, but the more you know what you’re doing, the less the risk: in a short letter, state any material or unusual contingency (home sale, availability of divorce proceeds), and then state that the buyer is approved at any price he or she or they may offer to pay, followed by a commitment to confirm to listing agents or sellers that the buyer can indeed perform at such a price immediately after such a price has actually been offered.

This approach means that the seller has no idea what the ultimate purchasing power of the buyer may be, and the buyer may operate without the confinement of specific “pre-approved” terms.

As a practical matter, if the banker can’t be found for confirmation at 9:00PM on a weekend, most sellers will wait until Monday. Most listing agents in a given sub-market know the selling Realtor and the banker, and know they would not submit an “any price” pre-approval unless they both trusted the buyer’s judgment and self-control; and despite the seller’s need for some pre-approval reassurance, most know intuitively that few buyers sign contracts at prices they can’t afford to pay.

And that’s perhaps the best element in the “any price” pre-approval letter: it injects trust in a usually adversary proceeding.