Don’t Let an Automated Pre-Qualification Crash Your Move
We’re still a long way from online mortgages with legitimate, automatic, prequalifications and preapprovals.
It’s officially 2016. We’ve watched as most things in our lives have gotten exponentially easier with the ever more rapid advancement of technology. We have access to so much more information than ever before, and often tasks that used to take hours or days, can be completed in minutes. Or in some cases, they can be totally hands-off and automated. These same advancements have allowed us to transition to a largely online mortgage process, including paperless processes. However, we’re still far away from legitimate, automatic, prequalifications and preapprovals.
There’s a few mortgage lenders out there, that have recently started advertising a more “modern” mortgage application experience, and a “digital” mortgage process. These claims are exaggerated at best. At worst, they’re completely fictitious, and leave home buyers exposed to tremendous liability. Maybe we’ll be there soon – but we’re not there yet. The mortgage application process still very much requires human expertise. Note, that I didn’t say that it simply required a human, but that it still requires a human that knows what they’re doing – not someone to simply guide an application or some software.
Most people are used to the application process for credit cards and auto loans. These are applications many people make every 1-3 years. They apply for mortgages much less often though. When working with new clients, one of the first things I do, is set their expectations for the process, which is often vastly different from what they expect.
See, credit card and auto loan approvals are heavily credit score dependent. To the extent that normally, that’s all that matters on the application. So it’s incredibly easy to make that an automated process. If all they truly care about is credit score, a lender can easily establish a web form for the borrower to enter their information, bounce that off the algorithms for their approval, and return an almost instant decision.
There’s two primary reasons that approving a mortgage is much, much more complex than this. First, while the credit score is a factor in mortgage approvals, it carries much less significance than it does with simpler loan types. A borrower with an 820 FICO score can walk into any bank or car dealership, and be 99% certain they’ll qualify, and qualify for the absolute best deal. In the mortgage world however, the credit score is only one of several factors that are considered. For the most part, I’d actually categorize it as one of the least important. That same 820 borrower isn’t guaranteed to get approved for a mortgage. Neither is the guy with 35% down. Nor the guy with $300,000 of reserves. Nor the guy that makes $25K/month. All borrowers must have a (1) qualifying credit score, (2) appropriate money down for the program minimums, (3) adequate reserves for program requirements, (4) acceptable debt-to-income ratios, and finally, (5) that income and money down have to be “qualified” – meaning they’re acceptable to be considered. Being strong in one or two of these areas won’t be enough if you’re high deficient in another.
That gets us into the second reason this process is different, and the true reason we’re not at a place for this to be an automated process yet. The real reason is that a normal consumer is not qualified to determine this information on their own. That’s not meant to be condescending – in fact, there’s many “functioning” loan officers out there not qualified to determine this information either. The reason the average person can’t be trusted to enter their own personal, financial information is because it’s the underwriting guidelines that determine how these questions have to be answered.
Here’s a very simple example.
A potential borrower has worked as a heavy equipment operator at a lumber yard for 3 years. He made $20/hr, and worked 50 hours a week, every week (making time and a half on the extra 10 hours). He changes jobs, and takes a very similar position at a different lumber yard in town, making $25/hr, and works the same 50 hours per week. He’s been at this job for 13 months.
If this borrower were to fill out an online application, 9 times out of 10, he will state that he makes $71,500/year or $5,958/month. This answer would be wrong though, and it would result in his income being inflated by almost $20,000 for the purposes of the application. The reason? Underwriting guidelines only allow overtime income to be included when it has been received from the same employer for 24 months or more. Even then, it has to be stable or increasing. If it’s decreasing, it will normally still be disqualified altogether.
Remember, this is a very simple example. If this borrower had gone online to one of the lenders advertising immediate pre-qualification letters, based on an online application, he would be under the impression that he has much more buying power than he does in reality. If this is caught in time, maybe it doesn’t result in anything more than wasted time and frustration. It can result in much more negative effects though, and in my opinion, offering such automated approvals are the biggest disservice a lender can put on their client.
Underwriting problems aren’t always caught when they should be though. Everyone likes to talk about the warm and fuzzy stories in real estate – the newlywed, first-time home buyers with the newborn, who are the first in either of their families to own a home – How they found the perfect place to start their lives together, and everything went exactly as planned. Yeah, this story plays out everyday – I usually play a part in a similar scenario every month.
What you don’t usually hear about though, are the stories of deals gone wrong, and the snowball of chaos that can result from a couple of up-front mistakes by a lender. Every single day in this country, there are countless numbers of people that are selling their homes and buying a new one. They’re using the proceeds from their sale to fund their purchase. They expect to close on their sale and the purchase the same day – but end up with a closed sale, a moving truck full of their belongings (with an hourly clock ticking), no place to put their stuff, and no place to sleep that night – because issues popped up at the last minute.
This is why it’s so important for buyers to understand what to look for when choosing a lender. So many people think that it’s like choosing a credit card, or an auto loan – where the only thing that matters is rate. Pricing in the mortgage world is extremely competitive, and it’s rare to find a rate difference between lenders greater than one quarter of one percent. As a matter of fact, if the spread is more than that, I would start to question if the lower quote is authentic. So, instead of wasting the bulk of their time and energy shopping rate, smart borrowers spend that time shopping for a competent lender, that they trust can get their deal done, and get it done on time. Because at the end of the day, coming out 1/8th of 1% better on rate, isn’t worth having your entire life sitting in a moving truck, and not knowing what to do next. That doesn’t mean that once you find someone you trust to work your deal, that you can’t double check their numbers to make sure they’re not out in left field – but smart buyers know what to prioritize.
Don’t get me wrong – the process has gotten a little easier over the last couple of years. Industry acceptance of electronic signatures has made the transaction itself much less time consuming – I offer a 99% paperless process. We’ve also had continued relaxation in underwriting guidelines that help lenders be comfortable making more “common sense” decision. Most lenders, including me, will start with an online application. Once reviewing that though, we’ll follow up with very specific questions to make sure we completely understand the information a client is providing us. This follow up can still be convenient – It can still be through email, text, or FB messenger – I.E. it can still be a painless, convenient process. But if you get a prequalification letter without an extensive interaction of some kind with a human, or worse yet receive a totally automated one, it’s not worth the paper it’s printed on – and you’re the only party to the transaction that will suffer from it.
If this comes off like a scare tactic, it’s because I believe that buyers should have some legitimate fears, and they should know what those need to be. The CFPB will coach consumers to only be scared about agreeing to a rate that’s a fractional percentage point higher than average, or a fee that changed more than 10% during a transaction – but they never coach consumers on the value of a smooth transaction. What’s worse, they assume the average buyer isn’t even concerned about whether a deal closes or not.
If you’re interested in learning even more, I invite you to check out Why Your Bank Doesn’t Care, where I cover why a banking deposit relationship does not translate into a leg up on a mortgage application. If you have questions about a current prequalification, or details on your scenario, please contact me directly at email@example.com.