Many real estate agents are recommending their clients obtain a mortgage preapproval letter before making any serious offers. In today’s housing market, preapprovals have become a common and sometimes necessary part of the homebuying process.
Preapproval letters indicate that a lender is interested in financing the buyer but should not be taken as a guarantee. Most preapprovals fail to account for any potential changes to a buyer’s financial situation and don’t thoroughly vet their claimed income or assets.
- Mortgage preapproval letters are not guarantees, but rather an indication that the lender is interested in financing the buyer
- Real estate deals can quickly fall through if the lender finds red flags in the buyer’s credit reports, income, or assets
- Common red flags include disputed accounts, unstable assets, recent employment changes, self-employed for less than 2 years, gaps in employment, etc.
A preapproval letter is not a loan commitment, which most real estate professionals understand. But equally important is that preapproval does not identify potential issues or “red flags” that may prevent a loan from closing. At best, a preapproval letter indicates that the lender is interested in providing financing to your client. At worst, it provides a false sense of security.
Preapproval does not take into account potential changes to a buyer’s financial situation, which could affect their loan offer. While a buyer may think their budget can easily support a down payment and monthly mortgage bills, a lender’s guidelines may show otherwise. If certain income or assets are not stable and continuous, then they are not considered verifiable. And if they are not verifiable, the lender removes the income or assets from the loan application—which frequently results in a loan denial.
This doesn’t mean there’s no value in requesting that your buyers obtain preapproval letters from their lenders. But it’s necessary to be aware of the red flags that lurk in the financial landscape of many buyers and to offer guidance on how to correct them. They may surface in credit reports, income documents, or asset account statements. And when they surface, they can be lethal to a real estate deal. The most common red flags include but are not limited to:
- Disputed accounts
- Collection or judgment accounts
- Deferred student loans
- Late payments on installment loans
- Recent changes in employment or job responsibilities
- Self-employed for less than 2 years
- Tax returns have Schedule E losses
- Tax returns reflect alimony payments
- Inconsistent history of supplemental income
- Base pay fluctuates from one pay period to another
- Gaps in employment
- Large cash deposits
- Insufficient funds to cover closing costs
- Insufficient funds to cover post-closing reserves
View the original article at RealtorMag