- The Washington Times - Friday, July 24, 2009

Q. We are in the market to purchase our first home. We are looking at properties under $500,000 and have enough cash saved up for a 20 percent down payment. Both my husband and I have good jobs working for the federal government. Our credit scores are close to 800, and we each have more than $200,000 in our Thrift Savings Plan.

When we approached a lender, he took our loan application and wrote us a preapproval letter. Our real estate agent told us the letter was too weak because it only referenced that we were qualified based on preliminary information. She said the lender should state that we are approved for the mortgage requested. She said any potential seller may balk because they will be worried we won’t get the financing.

Is it possible to get completely approved for a mortgage before we sign a contract?

A. Yes, most lenders are able to secure a “credit approval.” An underwriter actually reviews your entire loan package and approves your financing as if you have a ratified contract. If your maximum purchase price is $500,000, the loan package will reflect the purchase price and a loan amount of $400,000, representing a 20 percent down payment. The loan officer should submit the application using an interest rate that is above market just in case rates jump before you actually find the property. The approval will be complete subject only to a ratified contract and a satisfactory property appraisal report.

However, this process takes time. I’m not sure you will need to have your application manually underwritten for you to obtain a credible approval letter. Mortgage giants Fannie Mae and Freddie Mac, which were taken over by the federal government a few months ago, offer a service known as automated underwriting (AU).

A mortgage broker or lender can input your financial information such as assets, income and credit history into the AU system and the program will evaluate the information to determine if you qualify for the terms requested. If the AU system accepts the application, your loan officer should be able to write a letter stating that your application has been accepted by Fannie or Freddie’s AU system. In my experience, real estate agents and sellers have found such a letter sufficient to ease any concerns that the loan might not be approved.

Remember though, that the “garbage in, garbage out” rule applies. If you give the loan officer inaccurate information, the AU system might approve your application based on information that can’t be verified. If this happens, the approval will become null and void.

State regulators have taken up this issue. The Bureau of Financial Institutions in Virginia forbids mortgage brokers and lenders to write approval letters unless an application has actually been underwritten and approved.

It’s a gray area. As an owner of a mortgage company for more than 17 years, I do not hesitate to issue a letter confirming the acceptance of a Fannie or Freddie AU acceptance as long as I have personally verified the borrower’s credit, income and assets and submitted the file to AU.

In such a situation, it seems to me that, indeed, the loan application has been underwritten and approved, albeit by the automated underwriting system.

An experienced loan officer should be able to determine a good application from a questionable one within the first 10 minutes of the interview. Your situation described herein appears to be golden. Provide your loan officer with W-2s, pay stubs and bank statements. He should then be able to run your application through the AU system so you can obtain a sufficient approval letter.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at [email protected]

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