New mortgage programs that allow borrowers to obtain a loan commitment before they buy a house are gaining popularity -- and in some cases notoriety -- among many Washington area home buyers and lenders.
Ed Ross, a loan officer for Wye Mortgage Co., said that since his company began advertising its "loan first" program two weeks ago, "the phone has continuously rung with people asking questions" about the plan, under which borrowers apply for a mortgage and are approved for a loan before they start looking for a home.
Russell Rothstein, vice president of Investors Home Mortgage Corp., said his company has been processing two applications a week under its prepurchase approval program, which it started offering last February.
Other lenders have followed suit. Citicorp Mortgage Corp. last week unveiled its program, in which it verifies an applicant's employment, income, savings and debt information and issues a "preapproval certificate" that guarantees an applicant will get a loan for a certain amount provided the house appraises at the appropriate sales price.
Qualifying buyers before they select a house is nothing new. Most real estate agents insist that prospective buyers meet with a mortgage lender to review their financial situation so that the buyers know what they can afford and that agents won't waste time showing properties to people who can't get a mortgage.
But prepurchase approvals go a step beyond prequalifying a buyer. Whereas real estate agents or loan officers rely on information would-be borrowers provide to assess buying power, those with prepurchase mortgage approval programs actually send out verifications, run credit checks and take all the other steps necessary to close a loan short of obtaining an appraisal and a termite inspection.
And, if the applicant's financial affairs look good, the lender approves a loan, contingent only upon the house finally bought passing an appraisal. Most programs do not allow applicants to lock in an interest rate until they sign a sales contract.
Although prepurchase approval programs appeared briefly in the late 1970s, they are making a comeback as lenders search for new ways to attract clients in an increasingly competitive mortgage market.
Tom Marder, a spokesman for the Mortgage Bankers Association of America, a national trade group representing mortgage companies, said the number of companies joining the group increased 27 percent between 1985 and 1987, from 1,108 to 1,492, as a result of new companies formed to take advantage of the skyrocketing number of homeowners who refinanced their mortgages at the lower rates then in existence.
But as rates began to rise last April, refinancings, which had constituted 30 percent of mortgage companies' business, plummeted. That, along with the fact that existing home sales dropped 5.3 percent from levels a year ago, has cut loan volume in half.
"We offer prepurchase approvals to try to set us apart" from other companies, Investor Home Mortgage's Rothstein said.
Robert O'Toole, vice president of residential finance and government agency relations for the National Association of Realtors, said lenders are merely trying to "create a niche in the marketplace. They're doing anything to get borrowers to come in and talk to them about financing."
Prospective home buyers generally like the preapproval plans because they "reduce the anxiety" of having to wait for loan approval after signing a contract, said Michelle Thomas, who with her husband, Craig Payne, applied for a mortgage from Wye Mortgage and is currently searching for a home to buy. Also, "we wanted to know if we qualified for a loan before we bought a house," she said.
Carolyn Holmes, assistant branch manager for Countrywide Mortgage in Rockville, which also approves loans before purchase, said that having a loan approval when shopping for a home makes a buyer more attractive to sellers who many times may have three or more offers.
"It puts them on par with cash buyers because they know they have the financing behind them," Holmes said.
"It also streamlines the process of selecting property" because buyers know exactly what they can afford, said Michael Copley, Virginia sales director for Citicorp.
Ross said the program also helps buyers avoid last-minute glitches before settlement that could negate their locked-in interest rate. He said most buyers can be ready to settle on a house within two weeks after signing a contract, the time it usually takes to have a house appraised.
Some, however, do not like the prepurchase loan approvals. Camran Mostofi, chief executive officer of CAMCO Mortgage Bankers, said they are "meaningless commitments because the value of the property and its condition is not known to the mortgage company. The property is all the mortgage company has to secure the mortgage should the borrower default ... . Yes, they can make a seller feel comfortable that a buyer is approved. But if the house has a bad appraisal, no lender will approve the mortgage."
He also noted that approvals often hinge upon interest rates and "those move up and down daily."
Despite such misgivings, Mostofi said his company will soon offer a similar prepurchase approval program to keep up with competitors.
Cindy Rosen, a broker with Merrill Lynch Realty in Gaithersburg, said that borrowers may overlook more advantageous programs just to use a lender who preapproves applicants.
Other real estate agents noted that prospective buyers risk losing the fees lenders typically charge for such programs if they don't buy a house.
Wye Mortgage, for instance, charges a $250 fee for its loan program and doesn't refund the money if a buyer fails to buy a house.
And Donna Johnson, vice president of UFS Mortgage Co., which doesn't have a prepurchase approval program, said she sees no advantage to preliminary mortgage approvals because in the time it takes to have an appraisal done, a lender can usually verify a borrower's financial background.