The Truth about Pre-Approval Letters

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!

 

Buying vs. Renting is Not Always What You Think

Last spring I decided to buy a house. I made 12 above-asking-price offers, threw out contingencies, and lost plenty of sleep before getting an offer accepted. I hadn’t even begun the mortgage process and I was already a wreck. I was sorely underprepared for the emotional rollercoaster and, like many of my peers in a similar situation, ready to throw in the towel when I finally had an offer accepted.

As much as I hate to admit it, the decision to buy a home was largely emotional. I had spent very little time evaluating the financial impact of continuing to rent versus buy. Homeownership is part of the American dream, so how could it possibly make more sense to continue renting?

Many of my millennial friends seem to leave the rental marketplace (some for good reason!), but few of us seriously consider the important factors that should be influencing our buy vs rent decision.

For most young homebuyers the thought of detailed financial analysis and spreadsheets is overwhelming yet the most neglected part of the homebuying process.  We would prefer to spend our evenings lusting over the most recent listings on Zillow and dreaming of the day our home will be a featured post on Houzz. Our lack of financial knowledge and apathy could have a huge financial impact on our lives, yet we largely ignore it!

Enter the “Rent vs Buy Calculator” published by UpShot. This is BY FAR one of the most comprehensive (yet easiest to use and understand) tools I’ve seen to compare the financial impact of renting versus buying a home.

For those of you considering a home purchase take an hour or two to work on this tool before you enter into the largest purchase of your life. Don’t waste your time with lousy affordability calculators on other popular websites.

Here are a few variables you will need to consider before buying a home (many of which I did not):

Initial Costs: For many cash-poor millennials this will be one of the most important variables to evaluate. This includes your downpayment and closing costs (aka cash at closing!). Don’t be afraid to ask your lender to explain their closing costs because they may seem confusing for a first-time homebuyer. You may be surprised to learn that you can get a mortgage with far less than 20% down, so a good lender is important to walk you through your options.

Recurring Costs: These fees can add up quickly. Condominium fees, maintenance fees, association fees, etc. Oh, and when the dishwasher breaks a month after you move in that expense is now coming from your pocket.

Tax implications: Buying a home can have significant impact on your taxes, so don’t forget to take that into consideration. (I got some money back from Uncle Sam, which I’ll be using to replace the fridge from the 1980’s).

Future plans: timeline, inflation, home price appreciation and other future plans may have a significant impact on your decision to buy vs rent.

So, as tempting as it might be to partake in the American dream of homeownership, take some time to evaluate your financial situation. You might be surprised, it could make more sense to stay with that evil landlord of yours for a bit longer!