If you are in the market to buy a Silicon Valley home, you’ve probably noticed that about 1/3 of all real estate listings are distressed sales. Of those, most are short sales but some are REOs or “Real Estate Owned” by a bank or lending institution.  Most Silicon Valley REO listings, and even a few that aren’t bank owned, have comments from the listing agent insisting that the buyer be pre-approved from a direct lender. Some will go so far as to insist that it be Wells, Chase, B of A or some other institution. Or even that the buyer be pre-approved via that listing agent’s hand-picked lender.

Why all the fuss about direct lenders? Isn’t a pre-approval from a mortgage broker just as good? Isn’t that asking a bit much to tell buyers who gets to see their financial info?

Pre-Approval versus Pre-Qualification

Typically, in my experience, when a bank or credit union (both are direct lenders) issue a pre-approval letter, it’s only after the buyer has actually submitted everything (pay stubs, taxes, bank account names etc.) and the info has been verified by the bank, submitted to underwriting and OK’d for a window of maybe 90 days to complete the sale. When they say a consumer is pre-approved, they mean it (the vast majority of the time).  In other words, direct lenders usually don’t write fake pre-approval letters.

Mortgage brokers sometimes do.  (Not the better ones, of course.) What they have in hand may really be enough for only a pre-qualification (or “pre-qual”), not an actual pre-approval.  But sometimes mortgage brokers will issue a pre-approval letter.  We Realtors know that this is not an uncommon problem, and many of us don’t trust a letter from such a lender if the loan agent is an unknown person to us for that reason. With mortgage brokers there’s a crisis of credibility and that’s Problem # 1. (This is not always the case, of course. Many mortgage brokers are very careful and thorough so I am not saying that they are all terrible!)

The next issue to point out is that with mortgage brokers, the process will often be slower because another party is inserted into the mix.  Your loan agent might be great, but she or he still has to submit the paperwork to an institution that actually has the money to lend.  There’s a little less control because the folks with the money are one step further removed.  It’s an indirect lending situation, and that’s Problem #2.

It’s only fair to add something here, though, and that’s that there are plusses to a mortgage broker that make them more attractive to buyers and for these reasons, I usually do suggest that my clients work with a mortgage broker whom I trust.  Here are the big strengths: First, they can shop not just one lender, but multiple lenders.  If your loan gets rejected by one, there are other sources for the loan at hand.  Secondly, because mortgage brokers have multiple lenders available, they can shop for better pricing more effectively than mortgage bankers usually can.  Disclaimer: you still have to watch the fees, so check the APR. For cost-conscious buyers, this may be the best way to go financially.

Another alternative that many consumers don’t seem to be aware of is the loan agent or lender who is both a mortgage broker and a mortgage banker.  How does this work?  Your lender takes all your info and completes the package.  At the end of the transaction your lender’s company funds the loan (they are the bank, so a direct lender for the transaction).  But it’s set up so that your loan will be sold after close of escrow and they’ll have money to do it over again with another consumer.  So your ultimate lender may be one of the big guys or someone you never heard of.  The plus to home buyers is that there’s the benefit of the direct lender and the shopping ability of a mortgage broker.  These folks are very rigorous and precise with their paperwork because they do not want to keep your loan forever.

If you are a Silicon Valley home buyer, or want to be one, it is not a bad idea to keep your eye out for a few lenders to whom you might want to turn if the situation requires it.  Let’s say you have a great lender at Wells Fargo but the listing agent requires a pre-approval from Chase.  Don’t hurriedly walk into a local branch and just grab the first warm body you find to do your loan pre-approval!  That is no way to pick someone who will be so key to your success.  Slow down and hire more carefully.   Get recommendations.  Most real estate agents know lots of loan agents and we can share with you the names of good people at a variety of banks (there’s no kickback or referral fee, fyi). We ALSO know the names of many great & trustworthy mortgage brokers, too.  Just ask!

Finally, I want to add that I see a growing trend of listing agents even in regular sales wanting more control and access to buyers’ financial info.  Counter offers are coming back with demands that my buyers be pre-approved by the listing agent’s lender (often a direct lender, but not always). Recently I got a counter like that which added a “kick out clause” if the sellers didn’t like what the listing agent’s lender said about the buyers!  Our lending climate has been very difficult the last few years and too many real estate sales have been derailed by bad loan situations.

Do you have to show the other Realtor your credit report, taxes etc.?  No, in most cases you don’t.  Some of them are very pushy, though, and if you really want the house, townhouse or condo you may have to meet with their lender or give them more information to prove that you are financially capable of completing the transaction.  Often you can or perhaps should give them “proof of funds”, meaning proof that you have the downpayment or the full payment if it’s an all-cash offer (do black out your home address and account number, though) and they will feel more comfortable that you are truly qualified.

A pre-approval from a direct lender may also increase your odds of being taken seriously.  That doesn’t mean you have to use the direct lender, only that you’ve really been vetted.  If you want to purchase property in the San Jose area, it’s a good idea to be ready to engage a direct lender at a major bank should the listing agent require it for offer acceptance.

If you’re working with a mortgage broker, add another step to strengthen your case: have him or her phone your agent and the listing agent.  This will very likely smooth over any potential unease that exists if your lender and the listing agent don’t already know each other.  A conversation can do a lot to help.

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Note to readers/commenters: please limit your comments so that they are not so long that they should be a blog post themselves.  Blog protocol is to keep comments brief and concise.  I allowed a couple of readers to make long comments (more than 200 or 400 words) but reserve the right to edit longer comments for brevity or to not publish them at all, particularly if it’s a second (or third) comment by the same person and both (all) are long.

If the excessively long c0mments continue I will probably close commenting altogether on this post.  Thank you for your understanding.