Over the past couple weeks I've received numerous calls from frantic borrowers who had opened escrow, but were still attempting to line up their financing. Apparently, some hadn't even begun the approval process, while others discovered that their approvals were empty commitments.
Borrower Beware: the loan process is infinitely more complex and time consuming than even last year. Lender guidelines are constantly shifting, banks are understaffed, and everyone is busy. When you need financing to purchase a home, the last place you want to find yourself as you enter into contract is at the end of a long line. You should also know that when issuing their "pre-qualification" letters, major lenders seldom do any work beyond pulling credit and gathering basic information. TBD purchase transactions that are not in contract are almost never fully processed, much less underwritten. Instead, they tend to sit by the wayside, gathering dust until you have an accepted offer and are ready to move forward.
Pre-qualification is an extremely basic process whereby the borrower's credit scores are pulled to assure compliance with the proposed loan's minimum requirements. The borrower's income is lightly assessed and weighed against current debts, plus the proposed mortgage payment, property taxes, and insurance on the new home. This verifies that debt-to-income ratios are acceptable for the loan program. While this affords some peace of mind it does very little to satisfy the actual underwriting requirements of any lender. Once your loan file has moved onto the actual approval process that initial "pre-qualification" letter will quickly seem like a distant fairy tale. When comparing pre-qualification with actual lender approval think of the former as a cuddly teddy bear and the latter as a nasty, 1000lb grizzly bear.
Broker vs. Bank: In addition to being able to shop lenders and continually reposition your file for the best rates, another advantage of working with a broker is that they will actually process your loan file to verify that it's "approvable" per a target lenders' guidelines and overlays. Fannie Mae guidelines are modified on a monthly basis and each lender has its own set of "overlays" or added restrictions on what it is willing to underwrite. If you've been pre-qualified or received actual pre-approval and a month or two have elapsed during your hunt for a home, it is important that your broker or direct lender reconfirm that your qualifications meet current standards as you prepare to make an offer.
Here's a scenario from a recent Los Angeles purchase that illustrates how lender guidelines and overlays can affect a transaction. The borrowers originally wanted a $729,750 loan, backed by their 20% down payment. Wells Fargo's pricing was fairly competitive at the time and they were also willing to discount a $1000/month car payment with proof that the employer had made all payments for 12 months. Few lenders will allow for this and, without discounting the payment, the borrowers ratios were too high to qualify for the loan. The borrowers then entered into contract on a more expensive home, which required a second mortgage. In a classic case of one hand not knowing what the other is doing, Wells Fargo's first mortgage division confirmed availability of a Wells Fargo piggyback equity line and suggested that all was fine. What they didn't know is that buried in the equity line division's overlays was the preclusion of discounting that car payment, so the loan would have been denied. Fortunately, we had a back-up lender that could accommodate our needs.
Never presume that your financing is secure until the loan has funded. If working with a direct lender or mortgage broker, make sure that they are actively involved in managing your loan file. All borrowers and properties are unique and the loan process seeks to standardize both. That's why so much paperwork is involved and this ever-growing pile seldom fits perfectly in the lender's box of requirements. It's almost always necessary to push and prod a loan throughout the loan process.