Realty Views By Terry Ross
A Thing Of The Past?
October 22nd, 2013 – In years past, homeshoppers would many times begin the search with a visit to their lender for the tried-and-true mortgage preapproval – a process that used to be the gold standard for a prequalified buyer making an offer to purchase a home.
It was the process that let sellers know you were a serious buyer who could qualify for the loan necessary to purchase the property and also an excellent candidate with the ability to close a real estate transaction. Mostly these were written commitment letters from lenders with a maximum loan amount and estimated interest rate, usually written after running a credit report and requesting some cursory documentation from the potential borrower.
But new federal data suggest that preapprovals as we know them may be on their way out and may soon become as extinct as the old Multiple Listing Service books. Among the top 25 mortgage lenders, just 29,912 preapprovals resulted in mortgages that borrowers received to purchase a home last year, according to data released last month by the Federal Financial Institutions Examinations Council.
That’s down from 101,626 in 2007, before the housing downturn. Of the home loans that were actually closed, preapprovals accounted for only four percent of the mortgages, down from nine percent in 2007.
Much has changed in the marketplace in the last six years, which is reflected in these statistics. In addition to the fact that investors paying all cash have skewed the market away from traditional buyers who get a loan, many lenders require applicants to clear hurdles that surpass federal guidelines, with requirements that vary by institution, resulting in confusion for applicants. Even though lenders sell many of the loans back into the secondary market, they are scared of taking any chance whatsoever with a borrower, given what happened during the mortgage bubble of a few years ago.
Homebuyers who get rejected for a mortgage at one large bank could get approved at its competitor – assuming they know not to give up the search – and this keeps the statistics low on preapprovals that eventually turn into closings, especially since preapprovals did not precede any of the mortgages doled out to homebuyers by 14 of the largest 25 lenders last year.
“The popularity of preapprovals is quite low,” notes Mike Lyon, vice president of mortgage operations at Quicken Loans, which had 598 preapprovals result in mortgages last year, down 43 percent from 2007.
The low number of preapprovals, however, may also result in part from under-reporting by lenders. Government data are compiled from numbers released under the Home Mortgage Disclosure Act, which requires lenders to submit their mortgage and preapproval numbers to the federal government. Some lenders say they don’t submit data for their preapprovals because they don’t meet the federal definition.
Some housing experts, however, say the decline in preapprovals is largely due to dwindling competition among mortgage lenders for new clients. Prior to the recession, lenders used preapprovals as way to attract would-be borrowers. Buyers who had this commitment from a lender were more likely to turn to this company when they were ready to get the actual mortgage. That meant that preapprovals became a revenue source for lenders, but since the recession many lenders have shut down, and that has decreased competition for buyers.
Appraisal issues have resulted in fewer preapprovals as well. Since preapprovals are issued before buyers identify the home they want to buy, if the home’s appraised value is determined to be lower than the purchase price that the buyer and seller agreed to, the lender often requires the buyer to come up with the extra cash to make up the difference.
Several banks, including Chase and Bank of America, say rather than preapproving homebuyers, they’re mostly doing prequalifications. With prequalifications, lenders inform borrowers of the size of the loan they can qualify for based on their stated income and assets, as well as an initial credit check. Historically, getting a prequalification was the first step a buyer would take before shopping, which was then followed by a preapproval when the buyer became serious about a specific home she/he wanted to purchase. A prequalification gives lenders some wiggle room if they don’t like the transaction once the final loan application is processed and all of the documentation is collected – and actually is non-binding.
A prequalification doesn’t provide the same leverage to buyers, though, as an official preapproval, and most real estate agents understand this during the negotiation. Prequalifications are typically based on average mortgage rates rather than the rate that’s close to what the borrower would actually get. Also, most lenders can rescind a prequalification, whereas a preapproval is a commitment that usually lasts two to three months and, although not absolute, carries more weight.
This reluctance by banks to give preapprovals and the competition from all-cash buyers is just another hurdle that homebuyers face in today’s market with a landscape that is rapidly changing.
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at email@example.com or call 562/498-1049.)