Oct 1, 2018
I've talked to a couple of real estate brokers recently who have talked to lenders that are fully credit-approving pre-approvals by an underwriter. These lenders are touting the practice as a feature to get their offer chosen in a multiple offer situation. Sellers will pick a fully underwritten offer over another offer, they believe, because the fully underwritten offer is more likely to close.
Maybe. Maybe not.
I understand the reasoning. Lenders want an underwriter to review the borrower's paperwork to make darn sure they can qualify. They don't want to rely on loan officers to make that determination.
And there are definitely occasions when I consult an underwriter on a pre-approval. But I've worked in this industry for 17 years. I have literally closed thousands of mortgage loans in my career. I don't need an underwriter to tell me that a borrower with an 800 credit score, a 20% debt ratio and a 50% down payment is qualified.
Underwriting pre-approvals seems like a colossal waste of time. An individual underwriter could review hundreds of transactions that may never go anywhere. Do you know how many people I pre-approve that never find homes? Or decide to move to Nebraska? Or decide to rent for another two years?
Well, I can tell you. Because I track just about everything in my CRM (customer relationship management database). The answer is 36.1%. 36.1% of all the people I pre-approved in 2017 haven't bought a home (yet). Of the pre-approvals that did enter into a real estate contract, 80.9% closed.
So why didn't 20% of those transactions close? The inspection contingency wasn't satisfied. They decided to move to Nebraska. They decided to pay cash.
Do you know how many were declined by an underwriter after they negotiated a contract? Zero. Not one.
In fact, if I look back over the last four and a half years that I've worked for New American Funding, only three loans have been declined by an underwriter (in 2015 and 2016):
- One was an issue with the property. Underwriting the pre-approval would obviously not have caught that issue.
- One was an issue that may or may not have been caught. It involved an obscure guideline involving the date a previous FHA mortgage insurance claim was paid. Would an underwriter have caught it? No idea. It's highly likely they wouldn't have.
- One was an issue with residual income on a VA loan that definitely would have been caught by an underwriter.
So one, maybe two, transactions in four and a half years.
Instead of underwriting every pre-approval, why not train loan officers to do their jobs better?
When I started processing mortgage loans, I was absolutely blown away by the loan officers who had been in this business 20+ years and didn't know how to qualify a borrower or put together the paperwork necessary to underwrite a file. It wasn't uncommon for me to have stacks of tax returns on my desk every day because so many loan officers didn't know how to calculate self-employed income. They'd wait until I could do the calculations and tell them what number they could use.
So for people like that? Yeh. Definitely underwrite your pre-approvals!
But really, I think real estate brokers (and their sellers) ought to be able to do a little research to find out whether or not the borrower is really qualified.
- Ask questions! Call the loan officer. Did they run credit (some do, some don't)? Did they review the borrower's paperwork? I collect paperwork from every borrower: ta returns, W2s, paystubs, and bank statements at a minimum. I run automated underwriting. And if I have any question whatsoever, I talk to an underwriter.
- Do a little research on the loan officer. Check out the NMLS Consumer Database. How long has the LO been in the mortgage industry? Do they hop from one employer to the net every six months? Or do they tend to stick with one company for a while?
- Is the loan officer working in a call center or is he a career-centric loan officer generating his own business? I'm sure there are excellent loan officers working in call centers who are very good at their jobs. But for many, their focus is on volume. They're going to close 20 loans this month. They don't care whether your loan is one of them or not.
And educate your sellers: "Some lenders underwrite every pre-approval because they don't trust their loan officers to do their jobs. I've worked with Larry Loan Officer on at least a dozen transactions. I can tell you from experience that if he says Barbara Buyer is pre-approved, she's pre-approved."