Preapproval letters not worth the paper
Page | 1 | 2

Ten years ago, buyers were more likely to have a face-to-face meeting -- and some kind of relationship -- with their lender. Today, with so many lenders going online, it's easier for some buyers to think they can sneak one by the broker.

Either way, the result is that real estate agents don't take the letters at face value anymore. That puts the onus on the buyer to make sure their preapproval letter is as specific and revealing as possible, Patterson says. That will be valuable in a seller's market, where the listing agent will present the offer that has the best chance of going to closing.

How can a home buyer know if his preapproval letter accurately reflects his ability to get a mortgage? The amount of work that goes into creating it is a huge indicator of its value, says Bob Walters, chief economist for Quicken Loans, one of the country's leading online lenders. Ask the lender what kind of information is needed for the letter. The list should include pay stubs, your most recent bank statements and tax returns.

"If they say, 'Nah, I don't need anything from you,' you should have some concerns," he says.

Quicken takes a $500 good-faith deposit from a buyer to prepare a preapproval letter "and that doesn't come close to all the time and effort that's put into it," Walters says. The deposit is refunded at closing.

As much as buyers might not want to pay a fee for a preapproval letter, it is an indication of the quality of the document, says Jay Brinkmann, vice president for research and economics with the Mortgage Bankers Association. "Absent any verification and commitment from the borrower that you'd ever see them again, (the letter) tends to be cursory."

Unless the buyer or the real estate agent is willing to cover the lender's cost of verifying all the information, the letter produced will be a "best opinion."

That's when the real estate agent becomes the best line of defense, whether he represents the seller or the buyer, says Dick Gaylord, a Realtor with RE/MAX in Long Beach, Calif., and the 2006 first vice president of the National Association of Realtors. When he's working with a buyer, he works with the lender. When he's the listing agent, he follows up with the lender to confirm as much information as he can before he presents an offer to his seller.

"I tend to be very demanding when it comes to a preapproval," he says. "You could call a lender today and say, 'I want to buy a $500,000 house,' and he'll ask you some questions, but he might not check anything. I want the lender to check the credit report, verify the bank statements and verify employment. It's never foolproof, but we save a lot of problems by having a letter with some substance."