Every real estate agent would love their client to jump into a car on a Saturday morning before looking at homes and hand over a pre-approval letter from a local lender. As we’ll explain, the new TRID regulations have made obtaining a true pre-approval trickier. Instead, we’re beginning to see lenders shift to tiered scales of pre-qualifications, which in many cases are just as good. Agents and loan officers should be aware of the distinctions when communicating to each other and when educating their homebuyer.
We’re wary of any lender offering instantaneous pre-approval letters. “Approval” is a weighty term, implying that the lender has taken steps tantamount to issuing a commitment to underwrite the applicant. A true pre-approval means that the lender has reviewed borrower documentation – such as proof of income (W-2 and paystubs), tax returns, assets (relevant bank statements) and pulled a tri-merge credit report. Where this gets difficult, however, is that under TRID guidelines, lenders are no longer able to require documents from a borrower or that the borrower submit themselves to a credit pull. A borrower may certainly provide documents voluntarily – but it’s a thin line that we find lenders are wary to cross.
A quick word on TRID: a loan application is considered “received” when 6 pieces of information have been provided to the lender, including the address of the property. Once these six pieces of information are received, the lender is required to issue a Loan Estimate and other disclosures. It is only after accepting the Loan Estimate that the borrower can be required to provide documentation by the lender. Challenging right? Let’s make it even more challenging: the lender is now bound to this loan estimate, even if some circumstances change. That means they’ll have to cough up money to cover any changes in their estimated costs.
In our view, the industry should shift to a standard tiering of pre-qualifications, which provide the homebuyer with a robust understanding of what they can afford without putting the lender in an awkward position should new information arise.
- Basic Pre-Qualification: Phone or in-person discussion with the borrower with only self-reported credit score. This would not be a reliable pre-qualification, but does comply with ECOA, Reg B.
- Credit Pre-Qualification: Phone or in-person discussion with tri-merge credit report pulled by the lender.
- Full Pre-Qualification: Phone or in-person discussion, documents voluntarily provided to the lender (and even potentially reviewed with an underwriter), and tri-merge credit report pulled by the lender. This is the most reliable.
What would make a full pre-qualification even better? Ask the borrower to take some time to sit with the loan officer and talk through any issues that came up after reviewing their files. Not only will they have a good understanding of what awaits them when the process begins, but they’ll have much more confidence when they put their signature on that offer contract.
The way we built Maxwell should help agents and lenders accelerate their homebuyers to a full pre-qualification conversation. Our system makes it simple for the homebuyer to assemble their core document set voluntarily, and guides them through the process. It’s not uncommon for an agent who referred a client through Maxwell to have a full pre-qualification in-hand within 24 hours.
Now that’s refreshing!