The Seattle Times ran an interesting article on how on-line preapproval letters. It should serve as a warning to sellers to make sure that you are getting a pre-approval letter that is actually worth the paper it is printed on.

The agents said 39 percent of preapprovals issued by Internet-based lenders are faulty or invalid. Nearly 30 percent of mortgage broker-issued preapprovals are in the same category, along with one out of every five preapprovals from national lenders.”
A faulty preapproval letter may say something to the effect that “We have preapproved Mr. and Mrs. Flanagan for a 30-year fixed-rate mortgage at 5.5 percent in an amount not to exceed $500,000.” That allows the Flanagans to look at — and bid on — homes without anybody seeing proof of their actual qualifications.

But what happens when the lender simply relies on Mr. and Mrs. Flanagan’s statements about their income, assets and credit, and issues a preapproval without verifying the information?

“That’s where you can get into deep trouble,” says John Marcell Jr., a real-estate broker who is the incoming president of the California Association of Mortgage Brokers. He runs Compass Realty and Better Mortgage Brokers, both based in Upland, Calif.

Marcell’s loan brokerage does not issue preapprovals for buyers whose credit files, assets and income have not been verified, and his realty firm won’t accept preapproval letters if the information has not been confirmed by the lender or broker issuing the letter.

“In those cases [functioning as Realtor] we go to the [mortgage] broker and say, ‘Look, we’ve got to see the credit reports. We’ve got to see the W-2s. We’ve got to see the bank statements.’ ”

Compass Realty also warns the seller on homes it lists whenever preapprovals look dubious.