Mortgage preapproval letters not worth the paper
By Pat Curry • Bankrate.com

Start shopping for a house and inevitably someone will suggest you visit a lender and find out how much house you can afford.

That visit generally results in a preapproval letter from the lender. It's an important document because in hot real estate markets, many agents won't even show a house without some indication that the buyer can get financing to close the deal.

Unfortunately, a preapproval letter may give both the buyer and the seller a false sense of security because in many cases, the lender hasn't verified the buyer's information. The letter is loaded with so many qualifiers and conditions, it winds up meaning very little.

In a survey of more than 1,700 real estate agents and brokers about their relationships and attitudes toward mortgage providers, more than half of the agents said faulty preapproval letters were their top complaint with lenders.

Comments by survey participants to Campbell Communications, which did the survey for the trade publication Inside Mortgage News, made it clear that many of them didn't think the letters were worth the paper they were written on.

Lacking any legal recourse, real estate professionals are taking matters into their own hands.

Denny Grimes, a real estate agent in the hot Fort Myers, Fla., real estate market, has had so much trouble with preapproval letters that if he's representing the seller, he has a clause in his sales contract saying he has the right to review and approve the letter.

"If we don't like how it's written, we'll invalidate the contract in three days," Grimes says. "We're getting fed up. The letters are so generic. They're saying, 'Based on what this guy has told us, he's good for a mortgage.' You get into it and do some more discovery and they're not. It really ruins the buyers' and sellers' lives."

William Lyon Homes, a California-based builder, dealt with the issue by requiring all the buyers to qualify with his in-house lender, William Lyon Financial Services. They don't have to use the lender, but at least that way, the builder knows that the buyer will qualify for a mortgage.

He established the policy because too many lenders are willing to tell customers what they want to hear to keep the deal.

"I've heard guys say, 'I'll stamp out letters in the back room; I don't care. There are so many programs, they'll qualify for something,'" says Todd White, division manager for William Lyon Financial Services.

"There's an ethical issue you have to address in being truthful with your buyers. You have to deliver good news when you have it and bad news when you have it. Tell them what you can and can't do."

Of course, lenders aren't the only ones who are so anxious to get a deal closed that they're willing to take a few shortcuts. Buyers often aren't accurate in reporting their income, assets and debts.

Part of the reason for that is the explosion in the number of lenders, says Valerie Patterson, senior producer of the Wall Street Journal's online real estate section, Realestatejournal.com.