Banks are abandoning the use of pre-approvals as a step in mortgage originations. As competition among lenders has dwindled, there is less need for banks to offer would-be borrowers a letter confirming that they will likely get a mortgage at a certain interest rate.
Some mortgage professionals report that they are still using pre-approval letters; however, they are calling them ‘pre-qualification’ letters. Other lenders say they are using one or the other – and think the industry should agree on a name for these documents.
‘There are probably multiple reasons why banks are moving away from pre-approvals,’ says Peter Alongi, specialized mortgage sales manager at HSBC in New York City. ‘They have a fairly low conversion rate because they are based on what is communicated verbally and is not verified.’
In general, Alongi says, a customer might indicate his or her annual income and assets, and the lender could run a credit report and issue a letter indicating he or she has been pre-approved. ‘At HSBC, we move away from this pre-approval kind of process and gone down the path of pre-qualification,’ he says. ‘It sounds similar, but it allows us to see behind the curtain a little bit, ask the client for documentation to verify income, and as far as assets, we would ask for that, too. We are taking a more comprehensive approach.’
But some banks use the terms differently. ‘Pre-approval implies full credit approval, and most lenders don't do that as a matter of course,’ says Cyndee Kendall, northern California and Bay Area regional manager for mortgage banking for San Francisco-based Bank of the West. ‘You sit down with a loan officer, you give them your information, and to the best of their abilities and skill set, they come up with a preliminary decision, a non-underwritten result. In the industry, that has been called a pre-approval, but if you look at it from technical approval terms, that is pre-qualified.’
Kendall says Bank of the West uses pre-approval to mean approved by the underwriter – a step further in the process than pre-qualified. ‘We decided if it says approval, whether there is a 'pre' in front of it or not, it has to be fully approved by the underwriter, and we would not issue anything that indicates a commitment to lend without that.’
The terminology is confusing, says Ryan Bennett, vice president and Colorado regional manager for Colorado State Bank and Trust Mortgage in Denver. ‘They sound similar. There needs to be a new term, like credit approval,’ he says.
Bennett is seeing pre-qualifications, or the verbal, non-verified process, and fewer pre-approvals. He points to another reason for the slowdown in the more labor-intensive pre-approvals. ‘If the consumers are in that stage where they are thinking of buying a home but they're not sure, if they are not committed, they don't want to go through finding documentation,’ he explains. ‘It goes to the consumer as well. It's not necessarily the lender that doesn't want to do it.’
He adds that home builders want to see pre-approvals, to decrease their risk of outlaying money for a project and then the buyer being declined for a loan. Realtors also want their clients to have letters.
‘In most marketplaces, the bankers are known by the real estate brokers,’ says Lou Barnes, a mortgage banker with Premier Mortgage Group in Boulder, Colo. ‘If you have a local letter, it could make the difference in competing situations.’
Barnes says pre-qualifying letters can help borrowers in these competing situations, or bidding wars. If multiple borrowers are making offers on a home purchase, the potential home buyer who has a pre-approval letter might seem more attractive to the seller. The buyer has to look strong in the bidding process, while the bank has to remain in compliance when originating the loan. ‘In competitive markets, it's an art form,’ he says.
According to Home Mortgage Disclosure Act data on the Federal Financial Institutions Examination Council website, in 2012, there were 114,844 pre-approvals resulting in originations, and 50,211 pre-approvals that were not accepted, or did not become loans. That compares to 97,473 pre-approvals resulting in originations, and 42,400 pre-approvals not resulting in loans in 2011. Those are for conventional home purchase loans.
Steve Mix, executive vice president for the builder division for Nationstar Mortgage in Lewisville, Texas, says pre-qualification letters are especially useful for first-time home buyers. ‘We all know the credit box is much tighter than before the crash,’ he says. ‘We do use the pre-qualification request to give that borrower some comfort in knowing their options.’
Mix adds that the pre-qualification process is a very preliminary step in the loan process. ‘It does not impact the servicing,’ he says. ‘It could impact how far do we move with this borrower.’
Kathryn Brune, Cedar Rapids sales manager for Inlanta Mortgage, says Realtors and sellers want potential buyers to have pre-approval letters, because that might make the closing go more smoothly. ‘It has a huge impact on starting a loan that you can't finish,’ she says. ‘If the loan is killed before closing, you potentially have a family with a packed U-Haul, and then the seller has to sell their house, and it goes on down the line.’
Nora Caley is a Denver-based freelance writer.