Loan Approval? Yeah, Sure. Whatever.

 

Loan Approval is the process of applying to a lender for a loan, and being approved, or not approved, by the lender.

And most people start the application process believing that they have been “pre-approved,” and are just filling out the papers.

You would think that the Truth In Lending Act would make it illegal to tell a loan applicant that he has been “pre-approved” for a loan, when he actually has not been.

After all, it’s a lie, in respect to giving the applicant the impression that he is actively somewhere in the process of being approved, when in reality, the loan approval process has not even started.

The loan application process has started, but the loan approval process has not.

Of course, if “pre-approved” means that the loan applicant is somewhere in the application process before the approval process begins, i.e., this is prior to being approved, then the term could be argued to be accurate.

But if so, the term “pre-approved” is also meaningless, because everyone else in the world is also “pre-approved.”

So, in any event, it is obviously misleading, and intended to cause the loan applicant to believe that his loan has already been approved, and what he is doing now is just a formality.

It’s a lie.

Let’s look at what we are dealing with.

LOAN APPROVAL PROCESS

The process of getting a loan begins with the Loan Application.

That means filling out a form, sometimes a paper form, but usually an electronic form.

You might be filling out the form with the Lender where you are applying for a loan.

Or you might be filling out the form for a third party, called a Mortgage Broker.

Remember, Mortgage Brokers don’t make loans.  They don’t have the money.

They just get your Application and sell it to the Lender, usually selling it to the Lender who will pay them the most money for it.

They are promising you that they will find you the best loan, but what they will actually do is find the Lender who is paying the highest amount for Loan Applications at the time.

LOAN APPROVAL HUSTLE

Once you have completed the form, and have provided all of the supporting documents that are required to be included with the application, you might be told that you have been pre-approved.

“Pre-Approved” is a term used by Lenders and Brokers to tell a loan applicant the status of his application, but it is really just a ploy to keep the customer involved in the process, stringing him along.

“Pre-Approved” actually means that you have not been approved.

If you were approved, then the term “Approved” would be used, without the “Pre.”

And not only have you not been approved, there is no reason to believe at this point that you will be approved.

That’s because the approval decision has not been made, and the application is not even under consideration.

If the term “Pre-Approval” means anything, it means that you have provided all of the documentation required, and you have not been turned down yet.

But, to repeat, the reason that you have not been turned down yet, and the reason that you have not been approved yet, is that the person, or the committee, that will be making the decision on the loan application has not even seen the loan application package at this point.

Let me give you an example why “Pre-Approved” is such a meaningless term.

Before the economy went into the toilet, you would often get a letter addressed to “Occupant” saying that you have been “Pre-Approved for 100% financing on a new vehicle, along with no payments for 3 years, as well as a $5,000 Rebate,” all because you are occupying that property with that mail address, whoever you might be.  There has been no “approval” process.

So, be careful about taking any action and incurring any significant expense at this point based on the belief or assumption that you will get a loan just because you have been told that you are “Pre-Approved.”

WHAT REAL LOAN APPROVAL LOOKS LIKE

Now, if you have been approved, you will be entitled to something called a Loan Commitment Letter.

But, in fact, what you get now called an Approval Letter.

And it should more accurately be called a Conditional Approval Letter.

In it, you will find the language that the Approval Letter “may contain certain conditions which must be met before the Lender will release the borrowed funds.”

In fact, it more than “may contain,” it certainly will include a list of conditions that you must meet, such as:

  • Providing updated income or asset documents (that will need to be approved).
  • Pay off an outstanding collection.
  • Explaining certain financial withdrawals, transfers, and deposits on your bank statement (to the satisfaction of someone who works for the Lender, apparently).
  • Documenting the source of your own down payment (why is this anyone’s business?).

And, even with all of this, the Lender is using software called AUS – Automated Underwriting System, to generate the Approval Letter, and the list of requirements, and you will get what you think is a Loan Commitment Letter or Approval Letter, without a human being ever seeing your application, or evaluating it.  The computer sends these letters out automatically.

The truth is, when your loan is really approved, it will usually happen on the day that you are scheduled to Close on the transaction.

And, sometimes, even after you have come to the Closing, signed all of the Closing documents, and copies of those documents have been sent to the Lender by the Closing Officer, while everyone sits around the conference table waiting for the Lender to “release” the funds, your funds.

And yes, I have handled Closings where the Lender refused at the last minute to fund the loan, and the Closing fell through, because an actual person is looking at the loan application, and at the supporting documents, for the first time, before committing the funds.

The first time this happened, I was furious, and contacted the Mortgage company, demanding to know what was going on.

And it turned out that the parents of one of the Borrowers had given them the money for the down payment and they put it in their Savings Account.  Then on their Loan Application, they checked the box for “Savings Account” for the question of where the down payment would come from.  Then the bank statements showed the large deposit, and the Mortgage company decided that there was some fraud going on.  They refused to budge.

Now, unlike these national lenders, most local Lenders are nice people, because they have to be in order to survive in the local community.

But large national lenders are not nice people.  They don’t have to be.

I’ll give you another example.

Look at any HUD-1 Settlement Statement involving a large national Lender, and see the number of times that the Borrower is charged $1,500 to $2,500 for things that don’t actually exist, such as “Underwriting Fee.”

An “Underwriting Fee” is not something that even requires any time or expense on the part of the Lender, other than just doing their job.

It’s just a completely made up cost that the Lender is passing on to the Borrower.  It is not because of any work they had to do.

“Title Fee” is another one, usually $1,500 or more, that does not exist.

Title was researched and guaranteed by the Title Company, and the Seller is being charged for the work, not the Lender.

So, if you felt like a sheep waiting to be sheared the last time that you went through the loan process, your feelings were probably justified.

That’s just another reason why you should learn all you can about real estate finance, and stay away from these large national companies who are feeding off you.

Develop local relationships, and you will be getting the best deal possible.

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DISCLAIMER

I am an Attorney licensed to practice in TexasNorth CarolinaVirginia, and the District of Columbia.  But I am not your Attorney.  I would be honored if I were, but I am not.  Reading this Article does not create an attorney-client relationship between us.  Internet content should not be used as a substitute for the advice of a competent Attorney admitted or authorized to practice law in your state or jurisdiction.

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