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Life is complicated for homebuyers these days. There can be lots of competition with other homebuyers — too much, in some cities. And the selection of homes for sale in many cities is skimpy. Add in rising home prices and jumpy interest rates and you’ve got a lot of stress.
If you’re shopping for a home, you don’t need one more headache. And yet, here it is: Banks no longer want to preapprove customers for a home loan.
Preapprovals becoming extinct
MarketWatch looked at data from the Federal Financial Institutions Examinations Council. The report may not include all mortgages but it does include many.
- In 2012, the 25 biggest lenders saw only 29,912 preapprovals become mortgages. That’s just 4 percent of their loans for home purchases.
- In 2007, 101,626 preapprovals became mortgages — 9 percent of purchase loans.
Last year 14 of the 25 top lenders did not have even one preapproval that resulted in a loan. (MarketWatch doesn’t say whether that’s because the banks had stopped making preapprovals or because customers didn’t follow up their preapprovals by purchasing a mortgage.)
MarketWatch offers two reasons why preapprovals are disappearing.
1. Preapprovals weren’t paying off
Home prices fell so fast in the recession that it was hard for appraisers and banks to get a fix on a home’s value.
Lenders hire appraisers to figure out the market value of the home a customer is buying. That’s how banks make sure they aren’t lending more than the home is worth.
But that system developed problems after the crash. Lenders would watch borrowers and sellers agree on a sale price only to have the appraiser decide the home wasn’t worth the price.
Those buyers were left with two choices: Add cash of their own to make the purchase, or forget the deal. Many walked away from the deals and their banks got tired of spending time and money vetting borrowers only to see the deals fizzle out and die with no mortgage sold.
2. Banks don’t need to
Before the recession, lenders used preapprovals to attract would-be borrowers. Banks found that customers who engaged them for a preapproval were likely to stick with them to buy the mortgage.
When the dust cleared after the recession, fewer banks were left standing. Competition for your mortgage loan isn’t what it used to be. Preapprovals take staff time and, with fewer competitors offering preapprovals, banks have lost the incentive.
What it means to you
Why should you care? Because shopping for a home with a bank’s letter of preapproval gives you an edge with sellers. The letter gives you leverage when you’re up against multiple offers, cash buyers, and buyers with big down payments – all common today.
Your preapproval letter tells a seller that you can get financing, and that you are already partly through the process. That’s because, to get preapproved, you had to bring the bank documentation — proof of earnings, tax filings, bank statements, pay stubs, retirement assets and down payment funds — to prove you’re creditworthy. The lender checked your credit score and determined whether you could borrow and, if so, how much.
Your best option now
Now, you’re likely to be offered a “pre-qualification” instead. It’s a much easier process for you. The loan officer calculates how much you can borrow based on your word about your down payment, credit score, income and assets.
The difference between a pre-qualification and preapproval is significant, The New York Times says. Also, according to MarketWatch:
Pre-qualifications 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 pre-qualification, whereas a preapproval is a commitment that usually lasts two to three months.
Here are your remaining choices:
If you can still find a bank willing to preapprove you, it’s a good idea to grab it.
Otherwise, get pre-qualified before you start home shopping. It’s an important tool in learning roughly how much you can spend on a home. Also, it is better than nothing when you’re negotiating with sellers.
Prepare for mortgage shopping as much as a year in advance by improving your credit score, repairing any problems on your credit report, saving for a down payment and gathering the documents you’ll need to apply.