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When
is an Approval a Commitment?
The
other day I received an e-mail from a lady telling
me her tale of woe. Her plight raised the question,
What is an approval and is it a commitment to
lend? We'll get back to her case directly, but
let's first clarify some terminology.
In
the old days, our industry was asked to pre-qualify
borrowers. What that means is that some lender's
representative asked about income and assets and
perhaps even ran a credit report. They took those
data and ran some numbers to see if the borrower
was qualified for a certain loan amount. That
is a pretty loose process, especially as the lender
might not have actually examined paycheck stubs
or bank statements. Also, because many lenders
who would write a "pre-qual letter"
without having verified the accuracy of the borrowers'
assertions, people who relied upon the letter
might find out that they had been misled.
The
next step, of course, would be to take the borrowers'
application and verifying documents through the
underwriting process, just as if they had already
found a property. The lender would then issue
a credit approval, the actual property to be determined,
and subject to getting a purchase contract, title
report, and appraisal. While time consuming, buyers
going through this process have a much higher
confidence in their ability to perform, as were
those relying upon the approval.
With
the advent of Automated Underwriting, available
on almost all common loans these days, getting
pre-approved can be accomplished in an hour or
so. Note that the approval document produced by
the FannieMae's or FreddieMac's computers state
all the items required for a complete loan approval,
such as paycheck stubs to document income, bank
statements to verify the down payment and the
other items noted above. Note that a responsible
lender would not enter these data into the computer
without having received a signed loan application
and some form of verification. But, if everyone
has told the truth, there should be no problem.
After
finding a property, all the required documentation
is presented to the actual lender along with the
original findings produced by the Automated Underwriting
program. If the documentation conforms to that
specified, the lender then issued its approval
letter. Note that at this time there may be some
"Prior to Docs Conditions," a more recent
paycheck stub, for example, or a termite report,
or elimination of some questionable item on the
title report. When these are cleared up, the lender
would draw loan documents. Importantly, there
will always be some Prior to Funding Conditions
that need to be addressed. Now let's go back to
the lady who wrote me.
She
had received loan approval and the lender had
sent loan documents to the closing agent. She
had signed them and put her down payment into
escrow, and was expecting the loan to fund, but
the lender had refused to fund the loan, stating
that she had not satisfied certain conditions.
What she had not been shown were the lender's
Specific Closing Instruction, a sheet that tells
the closing agent what they must do to complete
the transaction. Most of these items are perfunctory
but a loan rep's foremost job at this point is
to assure that someone is taking care of each
of these items.
In
this instance, the closing agent did not bring
these instructions to the attention of the borrower
at the time documents were signed, and it sounded
as if the loan rep stopped doing his job. While
common sense would tell you that it was in their
best interest to get your loan funded, it is still
your loan and your responsibility to assure success.
The
lessons for you in this are several. Get pre-approved
by a reliable lender before initiating your search
for a home. When your lender tells you the
loan has been approved, demand to see the approval
sheet, and work with your loan rep to assure that
you are complying with all requirements. When
you sign loan docs, get a copy of the list of
all remaining conditions from the closing agent
and assure yourself that someone is handling all
of those items so your loan funds on time.
Be
careful out there!
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