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The Nation's Housing

Preapproved? Surprise!

By Kenneth R. Harney
Saturday, May 22, 2004; Page F01

Did mortgage hassles require you to reschedule -- or even cancel -- the closing on your home purchase?

Did the lender not quite get everything together because of "processing" or underwriting delays? Were there appraisal problems? How about unexpected complications related to the seemingly rock-solid "preapproval" or "pre-qualification" letters the mortgage broker or lender provided to help you shop for a home?

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If your answer is yes, a new study suggests you have a lot of company.

Fully 1 in 8 home purchase closings is knocked off track by mortgage-related issues, according to a survey by market research firm Campbell Communications of Washington. Three percent more are scuttled altogether.

The study covered a statistically representative national sample of 1,400 real estate agents and brokers and was commissioned by Inside Mortgage Finance, a lending industry publication.

Among the problems that appear to be getting worse: widespread misunderstandings among home buyers, lenders and real estate professionals about the meanings of preapproval and pre-qualification letters. According to the real estate agents interviewed for the study, 1 in 10 preapproval letters turns out to be invalid. When the home buyers applied for mortgages based on preapproval letters, the mortgage lenders or brokers could not deliver what the letters appeared to promise.

From the perspectives of real estate agents and home buyers, that can amount to a deal-busting disaster, because the buyers may have negotiated the purchase price of the property based on the belief that they had credit up to a certain amount.

Mortgage brokers and lenders have a sharply contrasting view. They say agents and home buyers often fail to read the text of pre-qualification and preapproval letters. Both types of letters typically hedge their promises in ways that no one should ignore.

To avoid getting derailed, here's a quick primer on what you need to know about preapprovals and pre-qualifications.

For starters, there is a big difference between the two. Pre-qualification simply means that somebody -- a mortgage broker or a loan officer -- has looked at the financial information you submitted and concluded that you may be eligible for a pre-defined maximum home price and loan amount.

The key point to remember about most pre-qualification letters is that they represent nothing more than a preliminary assessment of your financial picture and creditworthiness. Steve Galante, a loan officer for Broomfield, Colo.-based Myriad Financial LLC, said pre-qualification letters may not be "worth the paper they're written on." He said, "They are definitely not a commitment to make a mortgage."

Preapproval letters have more solid grounding, but are still carefully hedged. For mortgage brokers, a preapproval usually means that the broker has taken your key information and run it through some form of underwriting system to arrive at a sales price and loan amount range for which you appear to be eligible.

The underwriting systems used may be Fannie Mae's or Freddie Mac's widely used online services, or a lender's proprietary evaluation program. Preapproval, in other words, takes you a big step beyond pre-qualification. But it's still not a mortgage commitment.

Here's how Myriad Financial words its standard preapproval letter: First it reports to the buyer that, having run his or her information through an underwriting program, "your financial profile meets [Fannie's or Freddie's or a lender's] guidelines and you are eligible for financing" in the amount and terms stated in the letter. Then it warns the buyer that "any new accounts you open, credit charges incurred or credit inquiries entered on your credit report subsequent to" the date of the letter may change the whole ballgame -- the "qualifying price range and the interest rate you have been quoted."

The letter adds a final caveat: "Please note that your loan will need to be officially underwritten and given official approval before funding of the property may take place."

What can delay or significantly change a loan deal quoted in a preapproval letter? Most mortgage brokers and lenders can supply a long list of underwriting nightmares, such as credit reports that turn out to be not as squeaky-clean as expected or car loan or mortgage defaults incurred after a preapproval letter was issued. Or perhaps bank deposits declared for preapproval purposes turn out to have been gifts, not eligible for inclusion under the lender's underwriting rules.

The bottom line? Pre-qualification and preapproval letters may be reassuring to have as you shop for a home -- and even impressive to home sellers. But read the not-so-fine print: If your appraisal comes in low, your credit scores hit the skids, or your income and assets don't pan out, the mortgage you are "preapproved" for may not be the one that you get.

Kenneth R. Harney's e-mail address is kharney@winstarmail.com.


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