Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
One of the most common confusions in the mortgage industry is the distinction between “pre-approvals” and “pre-qualifications.” I have seen some mortgage companies that emphasize how they categorically only do pre-approvals and not the ‘generic pre-qualifications,’ whereas I have seen other companies touting how superior their real pre-qualifications are versus the ‘generic pre-qualifications.’ This ongoing debate will continue well past my tenure, but with all due respect to all those trying to split hairs on this matter, I humbly suggest that its all nonsense.
Let me give you the background of how this really plays out… More often than not, homebuyers will be previewing houses with no real intention of buying, when all of a sudden one spouse decided “this is the one.” The Realtor gives them the process of submitting offers and writing up contracts of sale and asks if they have a pre-approval. Surprisingly, a very small percentage of home shoppers actually spend the time in advance of their home searching to go through this process correctly, so they end up scrambling to contact the person they spoke to months ago, or they ask their Realtor or a friend for a recommendation.
In most of all the cases, this is all done very late in the game, where everyone is usually rushed to submit the offer with the necessary pre-approval documentation. The buyers connect with a mortgage representative, and within a few minutes, a pre-approval is generated. Therein lies the problem. A recent survey by the MBA showed that over 60% of the mortgage applicants are given assurances of a pre-approval or qualification for a program that they are either unqualified for or are offered a loan with less favorable terms than they deserve. As I tell most of my clients, you can go online and get a pre-approval online in minutes without speaking to a human being. The problem is, as the adage says, “garbage in, garbage out.”
In fact, it’s even worse. There are banks and brokers out there who are getting loans underwritten and issuing formal mortgage commitments to their clients very early in the process. While that sounds good, there is a tremendous risk to a would-be buyer. If someone is given a formal mortgage commitment and they cannot meet the terms and conditions and requirements of that approval, they are in jeopardy of losing their down payment deposit. I recently had a client who experienced this exact situation where a mortgage commitment was issued and presented to them, their realtors and their attorney’s and there was one condition there that could not be met. The bank put on condition that the loan approval is subject to the sale of their existing home when they had no intention of selling it prior to the purchase.
Of course, when the realtor and attorney went back to look at the initial pre-approval, nowhere did mention a pre-sale condition and it was clear that one hand didn’t know what the other was doing. In a marketplace such as this one where offers are being presented so quickly and which such pressure tactics, it is a tremendous risk to a would-be buyer to act hastily without the careful guidance of an experienced professional. We are in a transitioning market where prices are rising, and mortgage rates are rising – which leads to aggressive sales tactics to get homes into contract quickly.
My advice is to make sure that the commitment you are being provided is not only the formal mortgage approval, but it is also the assurance from your mortgage representative that they understand all of the terms and conditions, and that they are confident that they will be satisfied. Fortunately, and unfortunately for my new clients in the above horror-scenario, they didn’t lose their $30,000 deposit, but it did cost them a few extra dollars in penalties to the seller which was the best that I can assist with while getting the deal closed as a super rush and favor to all parties.
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