I was involved in the situation recently that illustrates how important it really is to use the right lender. If you have ever been under the impression that a pre-approval letter is a guarantee that a lender will issue a loan, read on.
Two months ago I began working with the client interested in purchasing an investment property to renovate and resell. We located an excellent property in a small-town nearby that needed a lot of repair but held tremendous potential - a true diamond in the rough so to speak.
After some negotiation, an offer was accepted by the attorneys representing the bank that now owned this foreclosed property. Along with the offer we presented a pre-approval letter issued by a local mortgage company that the buyers selected prior to contacting me. The pre-approval letter stated that the client was fully qualified for an amount exceeding the offer price. We were good to go with the loan pending a few minor stipulations relating to additional documentation that would be required from the buyer.
We went through an eight week long process of preparing for closing including multiple inspections and repairs. Three weeks prior to closing, an appraiser was sent to the property by the mortgage company. An appraisal report was issued and the buyer was notified that the appraisal exceeded the contract price. Everything seemed to be fine with the loan so far. There were no indications from the mortgage broker that we should anticipate any issues with moving to closing on time.
In the morning of the day just before the scheduled closing I spoke with the closing attorney and the lender and everyone was in agreement that the closing would be on time and without issues. I contacted the buyer and gave them the good news.
That afternoon, I received a disturbing call from the mortgage broker who told me that, after reviewing the appraisal report (done three weeks prior), the lender scheduled to underwrite the loan now refused to do so because the property did not meet their standards. The rating provided by the appraiser was only "fair" but the lender required a rating of "average" or better.
When I told the buyer of the situation they were devastated. How is it possible that they were pre-approved by the mortgage broker, had multiple property inspections, had some minor property repairs completed, and had received strong assurances from the mortgage broker that everything was fine and still have this occur the day prior to their closing - after eight long weeks of anticipation?
I did not have a good explanation.
Ultimately, the buyers became so frustrated with the entire fiasco that they decided to walk away from the property without even speaking to other lenders. The only thing they received, other than frustration, was a hefty bill from the attorney for services rendered plus out-of-pocket expenses for the inspections that they had paid for. Fortunately, they were able to recover their $5,000 earnest-money deposit from the generous seller - a return of which was not contractually guaranteed.
I relay this incident only because it demonstrates how crucial it is to be sure every professional involved in the closing of your property is competent. Few people understand the complexity of the purchasing process or the number of things that can happen to prevent a closing. In this case, the mortgage company did not even understand the complexity. They were utterly clueless that the sale might be derailed.
The mortgage broker in this case may have had some options that could have possibly saved this closing. They could have sent a separate appraiser to the property to provide a second opinion. They could have offered a different type of loan - one that would allow a "fair" rating and also provide some funding for renovations.
At the very least, the mortgage company should have been able to interpret the impact of the rating weeks prior to closing; thus, saving the buyer time, money, and frustration while allowing the seller to re-market the property to other buyers in a timely fashion.
When you begin the process of selecting a lender, do so with caution. Consider the advantages of using the local lender. Consider the advantages of using a primary lender rather than a mortgage broker. Mortgage brokers can be very good and in most cases have multiple sources from which to access funding. Some are very good at helping buyers who might have difficulty obtaining financing from more conservative primary lenders, such as major banks. Even so, shop more than just rates.
Be very careful about the ability of the lender / mortgage broker to provide a high level service. Interview the lender yourself and ask specifically about their experience and philosophy of customer service. Let them know that you expect accurate communication and complete competence in assisting your Realtor, your closing attorney or title company, and others involved in shepherding the entire process to closing. No one deserves to be blindsided the way this client was blindsided just hours before closing.
Choose your lender with care!