Posted by: Todd Long | July 30, 2008

Back up Mortgage Approval

Backup Mortgage Approval is something we haven’t needed in the past but has become ever more important in this changing Real Estate Market.  Leaders have had a knee jerk reaction to the lending crisis created by loaning money to individuals who probably shouldn’t have been approved for a loan in the first place. I know this is going to be hard to believe but some of those individuals defaulted on the loan.  If the market had continued to appreciate, the lender or the troubled borrower could have broken even selling the property.  Unfortunately home prices have come down over the past two years. 


Lenders have tightened up their lending standards back to a more reasonable level of credit worthiness and debt to income ratio, but with any knee jerk reaction they are now over reacting.  We have had several deals in our offices be a couple of days from the closing table only to have the lender present a couple of pages of conditions for the loan, or the lender has just disappeared and the phone is disconnected!  The newest wrinkle we have seen is the lender calling for the home inspection report and requesting everything on the report be repaired before they will fund the loan.  This included items such as the microwave oven light, which is an appliance and is not actually part of the real property. 


In the recent past the lender typically only required an appraisal and sometimes they would lend just based on tax value!  Lenders had stopped requiring a pest inspection to ensure the house wasn’t falling down from termites.  Again those were not safe and sound lending practices but now some lenders are over reacting with unreasonable request, in my opinion.


To diminish the chance that a lender will cause a home purchase to fall apart at the 11thhour I suggest having a backup mortgage approval in place.  If you are a buyer and you apply to a lender and get approved, within 2 weeks go to lender B and also get approved.  It is my understanding that if you apply too a second lender within 2 weeks it will not be a second hit on your credit report.  Then you will have two pre-approval letters to present with your offer to a seller!  Your competition normally presents one pre-approval to the seller.  So you look even better to that seller of the house that you want to purchase than other buyers.  If you have a problem with the first lender closing your purchase then you have lender B standing by ready to assist you.  If you apply to lender A and then 45-60 days later they can not complete the loan, when you apply to lender B at this point you will have a second hit on your credit report. 


As a seller you should request a backup mortgage approval with any contract that is presented to you.  Unless you are 100% satisfied that lender A will get the loan to closing, why wouldn’t you want to have a second lender standing by if there is a problem?  Make it a condition of accepting the contract.


We can get through this lending crisis but we need to be smart as we proceed.


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