Every Realtor has seen this happen.

A buyer gets a mortgage pre-approval, the offer gets accepted, and three weeks later the deal starts falling apart because of an income, debt or documentation issue that should have been identified before the offer was written.

That’s not always bad luck.

Sometimes, it’s a pre-approval process that didn’t go far enough.

Two Pre-Approval Processes Can Produce Similar Letters

Most listing agents can’t tell how thoroughly a buyer’s file was reviewed just by looking at the pre-approval letter.

One lender may rely heavily on automated underwriting and an initial review of the borrower’s information to issue a letter quickly. That can work well for straightforward files, but it doesn’t necessarily uncover every issue that could arise during full underwriting.

A more thoroughly reviewed pre-approval goes further before the buyer writes an offer.

For example, when a borrower is self-employed or has a complex financial profile, the lender may need to analyze tax returns, business income, debts, assets and other documentation in greater detail.

That’s where potential problems can surface.

The difference isn’t necessarily visible on the letter.

The risk can be very different.

A Real Case: An Income Problem Caught Before the Offer

An agent brought me a buyer who already had a mortgage pre-approval from another Colorado lender.

The buyer appeared to have strong income and plenty of room to qualify.

Our review uncovered an important issue: he was a 50% business partner.

The previous qualification had effectively treated the business income as though the borrower could use the entire amount. But his ownership interest was only 50%.

For a self-employed borrower, ownership structure and the type of business income matter when determining qualifying income. The lender needs to establish what income can actually be attributed to the borrower.

We corrected the calculation, rebuilt the file and the buyer’s maximum purchase price came down.

But the number was accurate.

And the financing held through closing.

The agent later told me that a similar income issue had surfaced with another buyer several weeks after going under contract.

Same type of problem.

Completely different timing.

Why Finding Problems Early Matters

A financing issue discovered before an offer is written is a problem you can solve.

The same issue discovered after the seller has accepted the offer can become a transaction problem.

Now there may be:

  • a contract deadline;
  • an earnest money deposit at risk;
  • a seller waiting to close;
  • inspections and other costs already incurred;
  • a buyer who has emotionally committed to the property;
  • and very little time to restructure the loan.

That’s why the quality of the pre-approval matters.

The goal isn’t simply to produce a letter quickly.

The goal is to know what you’re comfortable putting behind an offer.

One Question Realtors Should Ask Before an Offer

Ask your lender:

“How thoroughly has the buyer’s income and financial profile actually been reviewed?”

If the buyer is self-employed, has variable or complex income, owns part of a business, has unusual assets or debts, or has any other non-standard circumstances, ask what documentation has already been reviewed and what remains outstanding.

The earlier those questions are answered, the fewer surprises there are after the offer is accepted.

For straightforward W-2 borrowers, the process may be relatively simple.

For everyone else, it’s worth knowing what’s underneath the pre-approval letter before you compete for the house.

If you’re a Realtor and want a second look at a buyer’s financing before they write an offer, let’s talk.

Learn more at teamaronheim.com/for-realtors or contact me directly.