Lenders are hesitant to issue loan pre-approvals as a result of stricter Good Faith Estimate (GFE) regulations issued in January 2010 by the Department of Housing and Urban Development (HUD).
A pre-approval provides lenders and buyers with an accurate assessment of the maximum amount a buyer can borrow. A formal loan application is usually submitted when a pre-approval is written. No later than three days after a formal loan application is submitted, lenders must issue a binding GFE of all closing costs. Lenders cannot request any tax returns or bank statements from the homebuyer until the binding GFE is submitted.
Thus, lenders claim they are taking a great risk by issuing a pre-approval with a loan amount they are essentially bound to give without first assessing the complete financial history of the borrower or the value of the property for which they are borrowing. Of course this is nonsense since they can withdraw from the loan application process at any point and never make the loan, or change on notice all the costs at the time of closing. [For more information regarding GFE regulations, see the September 2010 first tuesday article, The good faith estimate is designed for shopping around.]
Larger banks are now waiting to issue pre-approvals until after the actual loan application is accepted — essentially eliminating the purpose of a “pre”-approval. Many are beginning to issue a “pre-qualification” (which still includes a credit check) instead of a pre-approval, which will delay the issuing of a formal loan application and allow lenders more time to write a GFE with which they are comfortable. [For more information regarding HUD loan regulations, see the January 2010 first tuesday article, Lenders take steps to avoid HUD’s updated GFE.]
first tuesday take: Nothing new here, with lenders still playing their hand at legerdemain. It is tough to give up old and engrained tricks. The only reason lenders have to delay the pre-approval and submission of a binding GFE is to delay the homebuyer’s opportunity to submit multiple loan applications to multiple lenders to shop around for the lowest rates and closing costs.
In fact, lenders are counting on the impatience and ignorance of homebuyers to forego any sort of price comparisons. That way, they have the freedom to charge what they see fit, not what a homebuyer is willing to pay. [For more information regarding mortgage shopping, see the May 2010 first tuesday article, Shop, shop, shop until you drop.]
The purpose of the binding GFE is to give homebuyers an accurate portrait of what they will be obligated to pay to obtain a mortgage. HUD created more rigorous standards for the GFE in order to allow borrowers the opportunity to choose a loan fully knowing what they are getting into and what the competition has to offer, which will hopefully reduce the amount of homeowners who are trapped paying costs they claim were never disclosed. [For more information regarding what questions to ask lenders when shopping for a loan, see the June 2010 first tuesday form, A borrower’s mortgage worksheet: who has the most advantageous financing.]
Selling agents simply have to advise their buyers to shop at least two lenders. Make sure your buyer pressures the lender for pre-approval and a GFE before paying anything so they can do the shopping HUD advises everyone to do.
Re: “Mortgage preapproval is harder to get” from the New York Times