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September 30, 2014

Banks Scale Back on Crucial Step in Home Buying

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Banks Scale Back on Crucial Step in Home Buying

Banks are reportedly losing favor of mortgage pre-approvals, which are often viewed as an important first step in the home buying process.

Mortgage preapprovals are a written commitment from lenders outlining the loan amount and interest rate that home buyers qualify for. They give buyers an indication of how much they can afford on their home purchase, as well as show sellers their commitment to purchase. 

But last year, only 29,912 preapprovals resulted in mortgages from the top 25 mortgage lenders — down from 101,626 in 2007, according to the Federal Financial Institutions Examinations Council. Preapprovals accounted for 4 percent of the purchase mortgages that lenders originated last year, and preapprovals did not precede any of the mortgages issued to home buyers by 14 of the 25 largest lenders last year, according to the council. 

“The popularity of preapprovals is quite low,” says Mike Lyon, vice president of mortgage operations at Quicken Loans. Quicken loans’ preapprovals are down 43 percent from 2007. 

Why are preapprovals losing favor, particularly as competition has been heating up in many housing markets? 

Some banks say that they are holding off on the preapproval until seeing the home appraisal. Until then, they prefer a prequalification, which tells borrowers the average size of loan they can qualify for based on stated income and based on an average of mortgage rates. It’s not as formal of a commitment for a loan. Preapproval are usually binding for two to three months. 

Some banks, such as Bank of America and Chase, say they are doing more pre-qualifications than pre-approvals. Chase, for example, says it gives buyers a “conditional approval” that usually lasts 90 days, but does not provide a written commitment. Chase says it often waits to give a written commitment until after verifying borrowers’ income, employment, and the home’s appraisal. 

Bank of America also says it waits to approve a buyer until a home is appraised and the borrowers’ finances are fully reviewed. 

Some analysts say that while preapprovals are showing signs of losing some favor, the federal data may not be a fully complete picture of how big of a decrease in prequalifications. The federal data relies on lenders submitting data on their preapprovals, and some lenders say their preapprovals don’t meet the federal government’s formal federal definition. 

Source: “Banks Abandon Mortgage Preapprovals,” MarketWatch (Oct. 2, 2013)

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