By Mike Miles
Doesn’t the idea of getting pre-approved sound exhilarating? It’s sounds super fun, right? I’m joking. Most people think that going through a pre-approval process sounds long, boring, and full of paperwork. I suppose imagine that’s why push button pre-approvals were created. It’s easy to follow a short cut. However, it’s dangerous.
Any shortcut taken to avoid a full-blown pre-approval will result in what is called a pre-qualification. A pre-qualification is an abbreviated version of a pre-approval. A pre-approval includes a full analysis of a borrower’s documented credit, income and assets. A pre-qualification is more of a credit check plus a very light version of proving income (i.e. a paystub). Most banks and lenders will only do pre-qualifications but turn around and issue you a letter saying you are pre-approved. This is misleading, and it causes problems for more people than just you.
Here is how a short cut can cause big-time trouble. Below is an example that happens quite often:
Mr. Buyer wants to purchase a home and is a first-time buyer. Instead of asking around for referrals he went online for a push button pre-approval. He entered some information and received an automated “approval” and received a letter of pre-approval. He never spoke to anyone. He made an offer on a house, and it was accepted. He deposited his earnest money and reserved a closing date 30 days down the road.
He started to send in documentation to the loan company. This was the first time his paystubs, W2s, tax returns and assets were documented. About 15 days away from closing he received a message from someone saying he was declined due to his employment history. After calling back multiple times trying to find someone assigned to his loan, he finally was able to speak to someone.
It was revealed to him the denial occurred because he was currently employed as a contracted employee. (Mr. Buyer has been in the same profession for three years but changed companies within the past year and became paid as a contracted employee versus a salaried/wage employee). The loan was denied, and Mr. Buyer had already paid money for home inspections and an appraisal. He would also likely lose his earnest money.
Meanwhile, the unknowing seller has lost other potential buyers because the house was removed from being actively listed. They planned to use the sale proceeds for the down payment on their new house, which is now in jeopardy because their house must go back on the market.
This all could have been avoided if Mr. Buyer had spoken to someone in person and took the time to do a full pre-approval. His particular employment situation would have been discovered and all these troubles wouldn’t have occurred.
I’m not picking specifically on push button pre-approvals. There are plenty of non-reputable loan officers that do the same thing; issue pre-approvals when all they’ve really done is a pre-qualification. They do this to save time and money, but as you can see it’s dangerous. Even if you’re a squeaky-clean borrower, please make sure you speak to someone and take the extra time to do a pre-approval. The extra 20 minutes is worth it.