Q: I applied with my daughter for preapproval on a loan with a mortgage company. I applied several months ago, and the lender never notified me that the preapproval was finally processed. The only way I found out was through my Realtor, who sent me the preapproval letter by email.
Shouldn't the mortgage company notify me that the preapproval letter was ready? The mortgage company approved my daughter and me for a loan at 6.25 percent. I thought that was kind of high. My daughter and I have excellent credit. I have no debt, and she has $5,000 of debt. She makes about $70,000 a year.
I am having reservations about dealing with this mortgage company. Here’s another problem: They didn’t even know how to differentiate between taxable income and nontaxable income on my daughter’s pay stubs.
A: Short answer: Yes. Find another lender. If for no other reason than it sounds as if you’re being quoted an interest rate that is far above the going rate for buyers with excellent credit, and you aren’t being given the kind of top-notch lender service we like borrowers to experience.
When borrowers have reservations about their lender, we always encourage them to shop around with a number of different types of mortgage lenders. As you move forward to buy a home, you need to work with people who are trustworthy, communicate well with you and have your confidence. If you don’t trust your lender, you should find someone new with whom to work that wants your business.
Having said all that, check with your daughter and confirm whether she received the preapproval letter from the lender. It could be that the lender sent it to her and not you. Frequently a lender will send information to one of the borrowers but not both. (This, of course, makes no sense, especially when co-borrowers don't live together.)
Moving on to the subject of preapproval letters: Years ago, lenders would issue “prequalification” letters to borrowers. In real estate transactions it was generally recognized that these letters were borderline worthless. These letters basically indicated that the borrower had met with a lender and the lender had gone over the numbers with the borrower; and based on those numbers, the lender thought the borrower could qualify for a certain loan amount. However, the lender did not view any of the borrower’s income documents, tax returns or pay stubs, or even pull a copy of the borrower’s credit history or credit score.
A prequalification letter was more like the lender’s nonbinding opinion of whether the borrower would qualify once he or she applied for the loan. (Today, borrowers go online and use one of any number of online calculators to get an idea of what they can afford.)
In a true preapproval letter, the lender commits to funding the loan as long as the property appraises out in value. The process of a preapproval letter is completely different from the old prequalification letters. First, the borrower applies for a loan. The lender then reviews the borrowers' credit reports, pulls tax documents, looks at bank statements and reviews documents. (Typically, this is handled electronically, and all of the relevant documents are generally pulled together in a matter of minutes).
At this point, the only thing missing in the borrower's loan file is the purchase contract for the home and the appraisal of the home. But at this point, a letter would be issued that says the bank will fund the loan provided the home the borrower chooses appraises out in value and subject to certain property documents.
These days, most lenders don't give you what we just described. While they may call it a preapproval letter, it is probably closer to a prequalification letter in terms of the information that's reviewed. In some cases, lenders may pull your credit but may not have taken a full loan application from you, have not have verified your job, credit and tax information.
However, this letter is what some real estate agents like to have to show to a listing agent that a potential buyer has taken basic steps in getting approved for a loan, and that someone — other than the buyer’s broker — has looked at the buyer and can say that the buyer looks “good” to move forward.
At this point, we think it's possible you never officially applied for the loan. (Did you pay an application fee? That would indicate you had applied for something.) Which may be why the lender never sent you an official preapproval letter.
Either way, we think you need to shop around. Talk to a number of other mortgage lenders, including a mortgage broker, a credit union and an online lender. Once you have these conversations, you should have a better idea about interest rates and costs. You should also evaluate these lenders and make sure they have a good reputation dealing with customers. You already feel like your lender is more in touch with the real estate agent than with you, and what you want is to have a lender talking to you and making you feel as though your loan is his or her top priority.
Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them through her website, ThinkGlink.com.