Mortgage Filter: Pre-Approval Means What? Snowflake details
November 30, 2016 7:36 PM   Subscribe

Some time after receiving bank statements, tax forms, pay stubs, firstborn child, etc., the loan officer sent an approval letter to my realtor and I thought we were all ready to go. I made an offer on a place and after a short dance it was accepted.

When the lender came back a few weeks later, he said the underwriters wouldn't underwrite it. He suggested getting a co-signer or putting 20% down. He had no other ideas. Neither of those are going to happen in my world. Sounds like a bunch of crap to me, but I'm a first-time buyer.

He said my score was too low (I qualify for FHA but not conventional, and there are only two condos in my city that are FHA and neither is acceptable to me, that is, I want to still be able to walk to work).

He also mentioned my medical collections (several small and less than $1000 total) were impacting it as well. I had a plan to pay off a collection a month (none are over $100); tried paying off one of the collections, say it was $60, and they returned me a receipt for $61, noting it as a "partial payment." So I'm not going to play that game with them til I have time to figure out the best way to handle that. (The original creditor/company has been bought by another group.)

Two questions if that's permissible 1)What does pre-approved mean if it doesn't mean pre-approved? For bonus points: Best way to pay off a series of small collections? It would be nice if they just dropped off in 7 years ('18 by my calculations) but maybe they are really impacting my score.
posted by intrepid_simpleton to Work & Money (16 answers total) 2 users marked this as a favorite
 
What is your credit score? What would the mortgage payment as a fraction your gross monthly income? What would your downpayment be? Do you have other debt?
posted by medusa at 7:53 PM on November 30, 2016


If you want to buy a home in the near future those "small" collections that may be a much as 5 years old have a huge impact on your score. You've basically demonstrated that you have a history of not paying all your bills on time over a long period of time. This can take 100+ points off your score (especially if you have payments 90+ days overdue).
posted by saradarlin at 8:14 PM on November 30, 2016 [8 favorites]


#1 - take care of the petty collections prior to moving forward on buying the house.
#2 - pre-approval means that the first pass indicates you're a solid lead. Unfortunately, at least 4% of people who are pre-approved do not get through underwriting. This is why most offer packages include an escape hatch for you if financing doesn't come through. Once you've resolved the petty collections issues, why not try a few more lenders?
posted by arnicae at 8:17 PM on November 30, 2016 [4 favorites]


Did their valuation maybe come back as less than the offer? I had pre-approval, which for me meant in theory they were happy to lend me X dollars but then when I had an offer on a place they had to look at the valuation and whatever other risk factors (I know for example they don't like to lend on some high density inner city apartments here as they can be hard to sell in a hurry).
posted by kitten magic at 8:18 PM on November 30, 2016


Your mortgage company hasn't agreed to loan you money until you sign your closing documents. The loan originator you talked to works in sales. His/her job is to sell you on getting a loan from that company. He'll get some basic info from you and make his best guess at if you can be leant money: pre-qualification. Then he gets some more information about you- credit reports, pay stubs, car payments, etc, and can get you pre-approved for a certain amount.

After getting your loan application, your file goes through a bunch of processing where obvious problems are weeded out: not having a social security number, not having any credit history, being unemployed, etc. Then someone calls your employer, orders your tax returns, verifies bank balances/child support/etc. Then the underwriters get the file and crunch numbers vis a vis risk to the company. While the loan originator is knowledgeable about loans, she's not the arbitrator on you getting money. That's the underwriter's job.

Common reasons on the borrower's part that loans are denied in underwriting are red flags on your credit report (like deciding to finance a car or stop paying your credit card) or change in income/discrepancies between reported income and actual income. Other reasons usually deal with the property itself.

As for waiting until 2018: any good lender is going to ask if you have "undisclosed debt"- that is, debt that doesn't show up on your credit report. It could mean "my brother loaned me $5,000 and I pay him back at $300/month" or it could mean "I have $1,000 in outstanding medical bills that are too old to be on my credit report." Don't lie on a mortgage application.

Any chance you're a veteran? A VA loan might be a good option, especially if your credit isn't great.
posted by thewestinggame at 8:21 PM on November 30, 2016 [8 favorites]


1. Sounds like you are still qualified for an FHA loan but not a conventional loan but the place you are trying to buy is not eligible for FHA? What exactly did your pre-approval letter say?

2. If you are not capable of wiping out less than $1000 in medical collections debt to boost your credit score, I gently suggest that you are not ready to buy a house. Buying a home has a ton of unexpected cash-on-the-table expenses associated with it, and if your savings doesn't exist to manage these detrimental credit items, you are going to get in over your head quickly. Keeping that debt is costing you way more than $1000 in loan terms.
posted by peanut_mcgillicuty at 8:22 PM on November 30, 2016 [32 favorites]


Do you have a mortgage broker? I'm in Canada, so I don't know how similar things are, but we just went through this and our mortgage broker was invaluable (and gets paid by the lender, not you). She hammered home over and over again that "Pre-approval is NOT actually pre-approval, it's just a rate hold. You still have to be approved. Please put a five-day financing clause in your offer" (in our market, a financing clause wasn't actually possible, but we went into things with our eyes open). The broker honestly made our lives so much easier and explained things so well.
posted by stray at 8:56 PM on November 30, 2016 [1 favorite]


The term "pre-approval" is misleading, in the context of mortgages. It sounds like it means "already approved" when in fact it means "the first step before approval." This was confusing to me as well.
posted by The Deej at 9:23 PM on November 30, 2016 [3 favorites]


Please forgive me if any of the below information seems obvious to you already! House buying can really screw people over and the impression your post gives a precarious cast to the situation. There are a lot of house buying factor details missing.

* Do you have your own copy of your credit report(s)? It sounds like you might because you know about all your collections. If not, you should take a look; the underwriter did. You can get one per year for free from each bureau at https://www.annualcreditreport.com/index.action
* You don't say much about your debt-to-income ratio, the lender isn't going to like anything too high there. Apparently FHA loans allow up to 56% (which is...bad), but conventional lenders don't want your committed expenses to exceed 45%, and many won't want to go even that far.
* The lender also won't like it if after the down payment and closing costs you don't have much cash buffer left on hand. They could require a certain amount of reserves.
* Without a 20% down payment, the financing will be more expensive, worsening that debt-to-income ratio. There will either be PMI (private mortgage insurance) until you have 20% equity or a higher interest rate.
* Another catch-22: The worse your credit score, the higher the interest rate, the bigger the mortgage payment, also worsening the debt-to-income ratio.
* Was the assessment of the property in line with the asking price? It usually is because the you making an offer suggests the house is in line with the market because there's a buyer, but if it's less for some reason that's another thing they'd have a problem with.
* You don't say how much your downpayment is. If you're giving the minimum FHA 3.5% or the conventional 5% as a down payment, remember that you will be starting with NEGATIVE equity. The standard real estate commission for the transaction is 6% of the purchase price coming out of the money the seller is getting, split between the buyer and seller agents, and you'll have paid out all kinds of money for various closing costs to boot. Remember that amortization of mortgages means that in the beginning of the process, you will generally be paying more interest than in principle, too, so equity won't be building quickly and that PMI will stick around. (If you haven't looked at an amortization chart for your loan terms, I highly recommend it.) So if for whatever reason you end up having to sell (illness! have to move somewhere for a job! lose your job and can't afford the place! the neighbors make you miserable!), and the price of your place hasn't increased by enough, you will have to PAY money to get out of the place. And you might not have that money. Or the price of your place COULD decrease--it could do that even if the house prices in your area haven't gone down (maybe something undesirable happens to the building). There's a thing called a special assessment for condos I expound on later. If you can't pay that, then they'll put a lien on your place, which means that will have to be paid off before any buyer can take possession of the property. That will complicate selling and make the property less attractive to buyers. Underwriters know that people who would have to pay money out of their own savings to move out are MUCH more likely to default on their loan, and that a place with a lien on it won't fetch market rate.
* If you open any new lines of credit or do anything new and interesting (new job!) between the time you get the preapproval and the time the underwriter comes in, it sets off all kinds of alarm bells for them.

It sounds like the moving from preapproval to final approval in this case was contigent on not finding things like your credit score and the bills in collections; once they were found, it threw up red flags and the underwriter refused to proceed. It used to be a lot easier to get a mortgage, but that's how we ended up with the mortgage crisis, so things have become stricter since then.

Other stuff I'd like to mention that doesn't directly involve preapproval:

* It sounds like $1000 is a lot of money to you given your collections and the plan for taking care of them piecemeal, but when it comes to owning a place, you can need that much money around in the blink of an eye for maintenance, repairs, or replacements for appliances. It sounds like you are buying a condo; when the condo fees aren't enough to cover the work being done, the building will do something called a "special assessment" and you'll be on the hook for costs you have little control over. Do you know the state of this condo's capital reserve fund? Are the monthly fees suspiciously low compared to other buildings like it in the area, making it deceptively more attractive?
* You don't mention inspection in your post. Have you paid for your own inspector (NOT one recommended by your realtor, who has a vested interest in you buying the property) to check and see if the place is in good shape or whether it needs work? An inspector can't catch everything, but it does provide an extra layer of protection from buying a huge mistake.
* Are you in a recourse or non-recourse state? The non-recourse states are Alaska, Arizona, California, Connecticut, Idaho, Minnesota, North Carolina, North Dakota, Oregon, Texas, Utah, and Washington. If you are NOT in one of those states, the lender can come after you even after a foreclosure or you can still be responsible for things. For instance, my mother had to keep maintaining the house she no longer lived in after a foreclosure or face HOA fees until the title was actually transferred to a buyer years later, the bank had no incentive to take it off her hands and relieve her of that burden.
posted by foxfirefey at 3:08 AM on December 1, 2016 [6 favorites]


Gentle Readers, how do I get the collections to not do what they did, which is (as I mention) I send them $60 and they send me a reciept for $61 with a partial paid notice? Several here seem to think I don't want to pay. I am willing to pay, but they are playing this game with me.

You've basically demonstrated that you have a history of not paying all your bills on time over a long period of time.

Hm. All my bills have been on auto pay for over 2 years, and all my cards are paid off (i.e. zero) except two which have about 25% on them. So I have been working hard for some time to get things in shape, except for the creditor I pay and they send me a bill with more than is owed and call it a partial payment. Didn't get any new credit, didn't buy a car.

kitten magic: By valuation, do you mean appraisal?

medusa: Mortgage payment will be no more than 25% of my gross and my downpayment is 5%.

And I've been employed at the same place for almost two decades (!), with a steadily increasing income.

All interesting and useful, and not enough time to formulate good answers before I go to work. Please allow for a delay in responses.
posted by intrepid_simpleton at 5:27 AM on December 1, 2016


Gentle Readers, how do I get the collections to not do what they did, which is (as I mention) I send them $60 and they send me a reciept for $61 with a partial paid notice? Several here seem to think I don't want to pay. I am willing to pay, but they are playing this game with me.

I've never heard of this as a strategy by debt collectors... are you sure they haven't bought up a collection of smaller debts, and are sending you demand notices for each one piecemeal? It sounds like a problem that could be figured out with a phone call: ask for a summary of all outstanding accounts, and write them a single check for it. I urge you not to pay them over the phone, though, if you think you're going to need proof of repayment to show your creditors--you'll never get a receipt from them, and a cancelled check is more tangible than a line item on a credit card statement.

Hm. All my bills have been on auto pay for over 2 years, and all my cards are paid off (i.e. zero) except two which have about 25% on them. So I have been working hard for some time to get things in shape, except for the creditor I pay and they send me a bill with more than is owed and call it a partial payment. Didn't get any new credit, didn't buy a car.

Percentage of used credit and number of new accounts are two things that can ding your score, yes, but they will move your score by maybe a dozen points. Multiple outstanding 30-day-past-due records on your credit score will move it by HUNDREDS of points. It is literally you demonstrating, to the people who you want to loan you hundreds of thousands of dollars with the promise that you repay it regularly, that you will not repay them regularly. This is the thing you need to get squared away before you have any further thoughts of home-buying.

medusa: Mortgage payment will be no more than 25% of my gross and my downpayment is 5%.

Even if you get approval on a loan, it will be several percentage points more expensive than a loan for a good credit risk, which works out to tens of thousands of dollars in extra interest payments over the life of the loan. A 5% down payment means the bank originating the loan is taking an even bigger risk by underwriting you; the combination of the debt and the low down payment is probably going to cause every lender you talk to you run screaming. Even if you pay that debt off today, it may still show up on your credit record years from now, but the fact that there are currently delinquent payments is a huge albatross around your neck.
posted by Mayor West at 5:41 AM on December 1, 2016 [3 favorites]


Just to caution you, I would do some research on your medical debt. Unless you specifically get in writing from the collector, it will not automatically come off your credit report if you pay the bill in full. From what I have seen, collectors are not required to remove the note on your credit report. They do have to mark it as paid but it's still on your report. Unfortunately, the "collections paid" status is about as bad as the "collections unpaid" as far as impact on your score. The whole system stinks and it does not encourage folks to pay off their medical debt after it has already hit their credit report. In any case, get in writing from the collector and follow up.

Also, I would pull the same credit report(s) that your broker is using. Some reports do not weigh the medical collections as much and you may think your number is higher than it is.

Good luck!
posted by jraz at 7:37 AM on December 1, 2016 [2 favorites]


Regarding removing your medical bills, I suggest checking out the resources on the Personal Finance subreddit, such as this and this. They provide a lot of useful information that is relevant to your situation (for example, that making a partial payment reset the clock on the statute of limitations, so it's not going to drop off your report anytime soon).
posted by jouir at 9:09 AM on December 1, 2016


By valuation, do you mean appraisal?

Sorry, yes I did.
posted by kitten magic at 4:59 PM on December 1, 2016


jouir: Thanks for the links. As there were 4-6 separate collections (depending on which of the Big 3's report I looked at), hopefully only one was re-set...at any rate, the dates on the others ranged from 2011 to 2014.

Mayor West: I have but one late pay from 2013 and I believe it was soon after that I put everything on auto-pay.

firefoxfey:
Do you know the state of this condo's capital reserve fund? Are the monthly fees suspiciously low compared to other buildings like it in the area, making it deceptively more attractive?

Yes, I received the operating budget when I looked at the condo's covenants, and I also interviewed four current residents and questioned them extensively about things. And HOA fees are pretty reasonable (I've been studying the condo market here for a few years now in preparation to buy). I know about the special assessments because the other building I really liked, had one right before I was ready to buy (and I also found this out by talking to residents). They needed to add a sprinkler system to get up to code, and it was ridiculous -- $300,000 split among maybe fifty residents, and divvied up by square footage.

You asked about an inspection. I got an inspection and the buyer, after some persuading, agreed to pay for the repairs we requested. I have gone over my personal budget three times til Tuesday and I am satisfied it is reasonable.

Also, I requested my credit report earlier this year (as some have recommended), and I got a response that I'd already ordered it (another jar of worms, but not one I really had time to get into). Well, it's almost 2017, I will try again. I thought my debt-to-income was low; as I mentioned I've paid off most of my debt/credit cards in the last three years, the two cards remaining are about 25%. And I have this hospital bill from two years ago, but that is practically gone, too: <$500. Long live the snowballing system.

jraz: Yes, yes, Get It in Writing.

I'm off to look at those sites recommended. Thank you all for your input and advice.
posted by intrepid_simpleton at 8:55 PM on December 2, 2016


Also, I requested my credit report earlier this year (as some have recommended), and I got a response that I'd already ordered it

You get one free credit report from each bureau per year, so if you tried one, try one of the other two.
posted by Slinga at 12:49 PM on December 4, 2016


« Older What grease/lube can I use to make my oven rack...   |   Sending a gift to Mexico Newer »
This thread is closed to new comments.