Realtor Dilemma: Mortgage Broker Pre-Qualification vs. Lender Pre-Approval
When given the choice between a Mortgage Broker Pre-Qualification and a Lender Pre-Approval, realtors should avoid the lender’s loan officer simply because more often than not these types of loan officers do a verbal application, pull the credit, and write a pre-approval letter based on information discussed in a conversation. They usually do not collect the required documents for an approval and often are not authorized to use the appropriate underwriting engines. They do not have lending or underwriting authority to approve loans, but are giving out a document that has the word approval on it. Due to this, most pre-approval letters from lenders should only be called an opinion letter.
Additionally, if the lender’s loan officer works for a national bank, he is a registered MLO for the bank and is not required to pass a national loan officer test – enabling him to write pre-approved on any letter without recourse to personal license or reputation. When licensing became required, the pass rate is 61.31% overall nationwide as of 4/1/2016. However, bank employees are not required to take the test which allows unqualified individuals who failed the test to continue working in the business for a bank/lenders. Thus, less qualified employees are now working at the lenders while more qualified loan officers on a percentage basis are working as Mortgage Brokers.
Personal Experience –
This is a conversation I have almost weekly: Eg. I often have clients call me on a Monday and say they have a ratified contract. I ask them did you have a lender letter already, or do you need a lender letter? They say yes, they had a letter and no they do not need a new one. See the realtor had them talk to their Lender/loan officer to get pre – approved quickly over the weekend to put the offer in. I say “great”. We finish the application and I ask them to send me the supporting documentation of the income, Paystubs, W-2’s, taxes, bank statements, etc. that you sent to the other lender for your pre approval. The clients say 8 out of 10 times, I did not send them anything we just did the verbal application.
At First Meridian Mortgage, it is policy to never write a pre-qualification letter without collecting the client’s required documentation (W-2, paystubs, tax returns, bank statements, proof of assets, etc.). All loan officers have access to the same Freddie Mac and Fannie Mae underwriting engines and are used prior to issuing any letter. If the income is calculated according to the documentation and all information is imputed properly, both parties will have the same results. I have never received a different outcome from the lender when all information is the same. Moreover, if the income is deemed unconventional or the client ratios are higher, no letter will be issued until we have had time to submit to underwriting for a full underwrite to determine eligibility. As a broker, I have the ability run though the underwriting engines internally, or to submit to underwriting without an address to receive a true Pre-Approval (2-3 days processing time). Lastly, once an actually address is determined the underwriter at the wholesale lender will change the preapproval to approved with conditions.
Realtor Dilemma: Mortgage Broker Pre-Approval vs. Lender Pre-Approval
If a realtor seeks a pre-approval, then a mortgage broker is always a better choice than a lender. As previously mentioned above, the lender’s loan officer does not have lending authority. He may or may not have collected the documents for an approval. He may or may not have run the file through the automated underwriting engine. He may or may not have submitted the file into underwriting to get an approval. Quite frankly if you do not ask these important questions, there is no way of knowing what has actually been done. To top it all off, this is being done by a loan officer that has not passed a test. More often than not, he sits in the office of the realtor who is submitting the contract and provides the pre-approval in a moment’s notice without the documents.
On the other hand, the mortgage broker pre-approval has been approved by the lender and has also been looked at with all the supporting documents. Clients/realtors are sure of this because the mortgage broker is licensed and at risk for his license. It is ILLEGAL for a mortgage broker to write / issue pre-approved or approved loans if he has not submitted to the lender first and received from them an “approval” of some type. Is it possible for some to work around this? Yes, but if the mortgage broker values his individual license he would not risk it. Furthermore, the employer would not let the mortgage broker do this for fear of being fined. To restate this more clearly, there are more protections for your client using a mortgage broker. Finally, a lender will never tell you what he makes or his compensation. A mortgage broker has to disclose every penny which is determined before a client calls in the event a lender paid compensation transaction is performed.
In both cases the best way to protect yourself is to call the broker and lender and ask these questions:
- Are you a mortgage Broker or Lender? Do you have the ability to approve loans?
- Has the client made a formal loan application?
- Has the client supplied all the necessary documents for the loan?
- Has the employment and asset been verified? Is there another house being sold that would be needed to qualify or supply the down payment?
- Do you have an automated approval?
- Have you submitted the file into underwriting and if not what would be the timeline for a submission to the lender for approval?
- Can you meet the timelines for closing?
If you ask these questions you will know where you stand and if the letter in question should be trusted. In most cases, I would weigh an experienced mortgage broker owner over a lender’s loan Officer every day of the week.
Information about the author: Kevin Retcher is the Owner of First Meridian Mortgage since 1996 and can be reached at 703-799-5636; firstname.lastname@example.org. His opinions are his and his alone, and not to be taken as legal advice. Always consult with a licensed professional.© First Meridian Mortgage Corporation NMLS# 180004 www.nmlsconsumeraccess.org