A mortgage pre-approval letter is not always what it sounds like.
June 10th, 2007 by tisnerWhen is a loan approval not a loan approval?
John and Mary are frightened and more than a little upset. They need to ask for an extension on the closing of their new home purchase because the financing is not ready. They made an offer on their new home 26 days ago and had no idea their Loan Approval Letter was not worth the paper it was written on! Now their Earnest Money is at risk and the money they already spent on a moving company is in question. In addition, they have already paid for the appraisal.
This is not a frequent occurance. It does happen often enough that savvy Realtors® and experienced sellers are somewhat wary of Mortgage Pre-Approval Letters from loan officers they don’t know through previous transactions. The reason they are wary is simple. Experienced Realtors® know that Pre-Approval Letters are written by loan officers, and loan officers can’t approve loans!
The who’s who of a mortgage transaction.
A Loan Originator is the real name for a person like me who is more commonly called a Loan Officer. A loan originator does exactly what the title implies. He or she creates (or originates) mortgage business. A loan originator’s primary job is to supply a never-ending flow of new loan clients. The title of Loan Officer is rather misleading. A good loan originator does not have to work very hard to maintain a flow of business. Previous happy clients and satisfied Realtors® will keep him or her pretty busy without the need to spend much time marketing.
After they find a client to work with, loan originators are responsible for making certain everything that must be done to close the loan, is indeed accomplished. This includes coordinating a Title Company, an Appraisal Company, a mortgage processor, two Realtors® (one for the buyer and one for the seller) and of course, the borrower. But, a loan officer does not approve loans.
The Loan Underwriter is an employee of the bank. The underwriter’s job is to make sure the borrower (represented by the Loan Originator) fits the Lenders Guidelines for Approval. The underwriter is the person who actually approves the mortgage loan. Very few borrowers ever speak with a Loan Underwriter. Many underwriters prefer it that way. They are busy people who want to be able to move quickly from one loan to the next. There jobs are dependent on speed and accuracy. Getting bogged down with client phone calls does not help with either speed or accuracy.
Whether you, as a borrower, are working with a Bank or a Mortgage Broker, your primary contact is probably a Loan Originator, not an underwriter.
A Loan Commitment Letter is the document an underwriter sends to the loan officer once a loan is approved. This is the real thing! A commitment letter will detail every aspect of the mortgage. It will include the terms and interest rate. It will itemize the “Conditions” (the items that must be provided or explained for final approval). The commitment letter will be dated and it will have an expiration date. It may be signed by the underwriter. The Loan Commitment Letter is a formal, legally binding document.
So, if you want to be sure your pre-approval is really an approval, request to see the Commitment Letter! If you are unfamiliar with anything in the letter, have your loan officer explain the unfamiliar portions. It is after all, your loan commitment letter and there is no reason you shouldn’t see it!
In Washington State and many others, the seller has the right to request this proof from the Buyer’s Agent. If the seller has a savvy Agent, the Agent will verify the validity of the Pre-Approval Letter by requesting a Loan Commitment Letter.
In John and Mary’s case, had they simply known to ask for a copy of their Loan Commitment Letter, they would have found out that the loan was not yet approved when the Pre-Approval Letter was written. It shouldn’t have happened the way it did, but this happens often enough that as an educated borrower, you must verify that your pre-approval is a genuine approval.