I. The MBA recommends that lenders use the following definitions relating to types of approval documents
Pre-Qualification – A preliminary non-binding opinion by a lender s qualified employee that a loan transaction is likely to be approved. This may be written or oral.
Much of the information supporting this opinion may be unverified, as it will often be based only on the borrower s oral and written statements. A prequalification is helpful at an early stage of the process, but lenders do not intend that buyers and sellers will rely on a pre-qualification as a basis for making significant financial commitments.
Pre-Approval ( AKA Conditional Approval) This letter communicates that the lender expects in good faith to be willing to provide financing to the borrower, subject to the satisfaction of conditions stated in the letter. These conditions will usually include all aspects relating to the property to be purchased and the related purchase contract, and may also include requirements for other additional information or verification.
A pre-approval differs from a pre-qualification in that the pre-approval letter indicates a higher level of confidence that the loan will be approved. It should be issued only after analyzing the borrower s credit report and sufficient other documentation to establish the general credibility of the borrower s application. Lenders with good procedures should experience a high correlation between pre-approvals and the issuance of final loan commitments.
Lenders should strive to issue letters with understandable conditions so that borrowers can accurately assess their status prior to entering into a purchase contract.
Borrowers and their agents should be counseled that allowing a reasonable processing time for a pre-approval letter will produce a more accurate assessment. Borrowers also should be advised to read and fully understand any conditions listed prior to entering into financial obligations.
Loan Commitment This letter is the final and highest level of loan approval.
In the interest of clarity, the MBA recommends that lenders use the term Loan Commitment only to communicate final approval. Any remaining conditions should be clearly stated and should be items which the lender believes are routine and are likely to be satisfied.
Borrowers should be counseled to carefully review all requirements and conditions in the loan commitment prior to allowing the financing contingency in their purchase contract to expire.
II. Approval Practices
Loan commitments and approvals of all types should only be issued by properly trained employees. Lenders should issue a loan commitment only if they are prepared to stand behind the commitment with their own corporate funds. If the commitment is dependent on another party such as a pmi company or investor, it should clearly say so.
Loans should be processed with a keen awareness of the time frames and requirements of the sales contract. Although lenders do not control all aspects of a transaction, they should do their best to minimize the financial risk of the borrower with respect to the sales contract. If a change in the terms of the sales contract is necessary to facilitate the loan, the lender should act with urgency to explain the requirement and the options to the borrower and sales agent. If a lender is unable to issue a commitment letter that both satisfies the terms of the sales contract s loan contingency clause and contains conditions that are reasonable and expected to be satisfied, then the lender should issue a letter of declination. If a lender issues a commitment letter but the borrower is unable to comply with the conditions, the lender should decline the loan.