Q: I completely disagree with your answers to the recent letter about sellers who are requiring a credit report in order to consider an offer for purchase.
I recently sold three rental homes in a 1031 tax-free exchange. Despite the fact that three potential buyers submitted pre-approval letters with their purchase offers, the sales fell through because, in the end, they could not secure the financing.
After the homes were put back on the market, I required all potential buyers to submit a valid copy of their credit scores with all purchase offers. I then accepted a purchase offer, based on the fact that the buyer had a 20 percent cash down payment even though she had only marginal credit. I selected her offer over another offer from a buyer who wanted to put nothing down but had decent credit. They both had pre-approval letters from their lenders.
But this buyer also couldn’t come through with financing. Although her 20 percent down payment gave the impression that she could secure financing, I discovered that her loan was denied because her credit report showed that she had been 120 days late on a previous mortgage twice in the last 12 months and that loan ultimately went into foreclosure.
Lenders not only consider the borrower’s credit scores, they also consider the actual information on the credit report. Late mortgage payments on a credit report lower a borrower’s credit-worthiness in the eyes of a lender, below where the borrower’s credit scores would initially indicate.
After the houses went back on the market again, I required all potential buyers to submit their credit report with scores along with the purchase offers. If a buyer wouldn’t submit their credit report, I wouldn’t even consider their offer. I didn’t care about the buyer’s personal information (their address & Social Security number could be blacked out on the report). I just wanted to know if they had a late mortgage payment within the last two years. The properties finally sold to a well-qualified buyer.
Despite your statements to the contrary, preapproval letters are not a guarantee that the buyer will ultimately be able to get financing. Lenders write them out a courtesy to loan applicants, but they’re not legally binding. Unless a preapproval letter “guarantees” and/or “warrants” that the borrower will get a loan, with the only condition being that the property appraises out in value, it really is not an instrument that a seller can rely on.
By the way, when I submitted my purchase offers for replacement properties, I did submit a preapproval letter simply because sellers are brainwashed to think it means something.
However, I also submitted a copy of the deposit check, a bank printout showing sufficient funds, and my credit report with scores (the Social Security numbers were blacked out). All sellers took me seriously, and my purchase offers were accepted.
I fervently recommend that sellers require a prospective buyer’s credit report with their credit scores. If they can’t understand a credit history report, perhaps a mortgage broker could help them review the information. Knowing the exact details of a potential buyer’s credit report will potentially prevent a seller from going through the disappointment and frustration of having their home fall out of escrow.
A: Let me start by clearing up what I mean when I talk about getting preapproved for your home loan. The preapproval process requires your lender to process your application. Once your income, assets and liabilities have been verified, the lender issues a preapproval letter. This letter should state that the lender has committed (in writing) to funding the buyer’s loan provided the home appraises out in value.
If you don’t get this written commitment from the lender, you essentially have a pre-qualification letter, which is not a good indicator of whether the buyer will ultimately be able to secure financing.
It is interesting that when you first required just the credit score, you got fooled. It’s true: Someone can have a pretty good score, but have a few serious pieces of negative information on their credit history that will ultimately prevent them from getting their financing.
Since I have begun to get a few letters on this topic, I’m going to open it up to you, Readers. Is this happening to you? Agents and brokers, are you seeing this happen to your clients? How do you feel about it? Feel free to email me through my website, ThinkGlink.com. Letters will be printed in an upcoming column.
Nov. 19, 2004.