004 - The Pre-Approval Letter that can kill your deal

What is a pre-approval letter actually worth?

In Episode 4 of the Loan Daddy Podcast, Scott Nadler explains why listing agents should never treat a pre-approval letter as a simple checkbox item.

Using a real-world example where a buyer’s approval amount dropped from $800,000 to $390,000 after a proper review, Scott highlights the risks of relying on weak or automated pre-approvals and shares the exact questions top-performing listing agents ask lenders before moving forward with an offer.

Topics covered:
 • The difference between strong and weak pre-approvals
 • Why online-generated approvals can be misleading
 • Buyer qualification red flags
 • Appraisal management companies and local appraisers
 • Asset verification and gift fund requirements
 • Underwriting review and contract timelines
 • Property-specific financing concerns

Whether you’re a listing agent, buyer’s agent, lender, or homebuyer, this episode provides practical insights to help you evaluate financing strength and reduce risk in a transaction.

Follow the Loan Daddy Podcast for more conversations on mortgages, real estate, leadership, and business growth.

Transcript

SPEAKER_00 0:00

After 10 minutes of having this talk, we realized that she previously had a pre-approval letter for a loan amount of $800,000. And after our talk, we were only able to pre-approve her for $390,000. Welcome to the Lone Daddy Podcast episode four. My name is Scott Nadler, and this episode is for listing agents. A colleague of mine based in Berkeley, California, FM, shout out to FM. He posted something on his Instagram account that was titled Questions for Listing Agents to Ask When Receiving an Offer with a Pre-Approval Letter. I get these questions all the time from listing agents, from top teams. Whether it's the top agent themselves or team members, consistently from the top teams, I do get these phone calls. So FM outlining the top questions to ask, I thought was really valuable to provide to real estate agents. I think at this point it's well known in the real estate world that not all pre-approval letters are created equally. But I see it time and time again where I'll receive a pre-approval letter for someone when they're not in fact pre-approved. And I think it's really important for agents to understand that. That again, not all pre-approval letters are created equally. It really depends on the person that is issuing it. We live in a day and age right now where clients can go on a company's website and generate their own pre-approval letters. And it really doesn't mean anything because it's only valuable when a professional who's in the industry can analyze their income, their assets, their credit to give the buyer and the agent confidence in what their true purchasing power is. This happened last week, actually. I spoke to a client and first-time home buyer. She was previously pre-approved with a different lender, and then she called me because she was shopping around for rates. So in her mind, this is going to be a two-minute phone call because she was going to ask us what our interest rate is. I would tell her it would be higher, lower than what she was expecting, and that would be the end of it. But we asked questions, right? We had a 10-minute conversation asking questions about her income, where she works, how long of an employment history she has, where the funds are coming from for the down payment. All normal questions that any mortgage professional would ask. After 10 minutes of having this talk, we realized that she previously had a pre-approval letter for a loan amount of $800,000. And after our talk, we were only able to pre-approve her for $390,000. Now, at first, she was flabbergasted, right? She said, I spoke to a different lender, I filled in an online application, we had a quick conversation where I filled in some of the gaps that were not on my online application. And within minutes, I got a pre-approval letter. Now, again, based on that alone, it doesn't seem like that mortgage professional went through the typical steps that one needs to do to determine whether or not someone or whether they're approved for the amount that they're looking for. And that was the case here. And when Christine and I were going through her financials and we broke down the numbers to like very specifically to determine to show her why she's not approved for $800,000 and why she's approved for $390,000, she got it. And it was really valuable for her, and she was very thankful, as was the real estate agent who I called up afterwards to let him know that I know she was previously approved for one amount, but it doesn't seem like she will be approved for more than $390,000. Again, these pre-approval letters are not a formality, it's a value proposition. And if a client is not willing to take 10 minutes to answer some basic questions, then they might not be ready. They might not be serious about buying a home. If someone's looking for a lender to lend them, it could be $100,000, it could be $5 million. The lender has a right to ask certain questions to determine whether or not they qualify for the amount that they're looking for. So when you're a listing agent and you receive a pre-approval letter, and this is what this post is about here, and I want to go through these questions here. These are great, fantastic questions to ask to ensure that the pre-approval letter that you're receiving is a legitimate letter. Let's start here. The first question is what type of income does the buyer have? And what they're asking there is, is this person self-employed? Are they a W-2 employee? Are they 1099? Are they commission income? Giving the agent a sense as far as where the income is coming from and how they're being paid is a great first question. Number two, does the buyer own any other real estate? An obvious question. Because if they own other real estate, will they be selling that home? And do they need the proceeds from that sale to buy this new home? Are they not selling? And does that person qualify holding the debt on their current home in addition to the debt that they will be incurring on the new home that they're purchasing? Number three, which appraisal management company does the lender use? I love this question. This is really fantastic and one that not a lot of agents will ask or even know to ask. And the reason this is important is because an appraisal management company, also known as an AMC, not the movie theaters, a bank or a lender will use an appraisal management company and they will send out the address of the home that needs to get an appraisal and they'll receive bids. And usually they'll accept the lowest bid to inspect that property. And the problem here is, let's say, like we're in New York City, if someone works with a bank that's not based in New York City, they might use an appraisal management company, outsource that appraisal, and have a company from Buffalo or New Jersey come into Manhattan to inspect that property. That's when problems arise. So ensuring that when you receive that pre-approval letter, that you ask the lender which appraisal management company they are using and to make sure that the appraisers are local appraisers who know and understand the area that you're selling your home in. Number four, have two years of tax returns been reviewed? This is really primarily for self-employed people. Usually, if someone is not self-employed, tax returns would not be needed. But it's a great question to ask just to make sure that, again, if they are self-employed, that their returns have been looked at. Number five, have the buyer's funds to close been verified? As a listing agent, you want to make sure that the buyer has enough money for the down payment, closing costs, and the reserves, right? What's left over in the bank after closing? So making sure that the mortgage professional went through their assets to ensure that they can satisfy those three categories. Number six, is the buyer using gift funds and are they documented? We see this a lot now, specifically with first-time home buyers, where they don't have the funds necessary for that down payment, so they'll get money from family. So making sure that we know where that money is coming from. The money, the gift funds, have to come from a direct family member. You cannot get a you cannot get funds, gift funds, from some random person, from a friend, from your mortgage lender. It has to come from a direct family member because there are all these anti-money laundering laws that banks and lenders have to follow. Has this been underwritten by a staff underwriter? I love this question too. Because someone in my position, I'm the loan officer on the transaction. I am not the decision maker on the file. Now, personally, I have a history of working in underwriting. I have team members who also work in underwriting, but we are not the underwriter. You can almost think about this like I'm a lawyer and I'm presenting your case in front of the judge. I'm not the one who's going to rule whether you're guilty or not guilty, or in this case, approved or not approved. But I've been doing this a long time. I know how to structure your file so that when we present it in front of that underwriter, we get the verdict that we're looking for. So asking the question is has this been looked up by an underwriter is really a deep and really important question. Number eight, can the lender confidently meet the contract timeline? Our industry is filled with timelines from when someone has to apply for their mortgage after they're in contract to getting the commitment letter, to getting to closing, and a few other steps along the way as well. And talking to the lender and making sure that they can meet the deadlines that are put forth in the contract can be the difference between that buyer closing and not closing, and in a worst case scenario, losing their deposit entirely. Is the approval contingent on the sale of the buyer's current home? Again, that goes back to a previous question where you're asking if the buyer has owns any other real estate. And the last question here is has the approval been updated for this specific property? So here in New York, we're surrounded by co-ops and condos. In addition to getting the buyer approved for their mortgage, we have to get the building approved also. So we can issue a letter for a prospective buyer and says that they're approved, but it could be a general letter. If the offer that they're making on a property, if that building, that condo, let's say, is experiencing issues, there could be a lawsuit going on in the building, there could be excessive sponsor ownership, there could be excessive commercial space, could be a whole host of issues happening in that building. So asking as the listing agent, is this letter specific to this property will alleviate some of those concerns that a listing agent will have to make sure that the lender can close in that building. So again, I love these questions. I would encourage agents all over to save these. And when you receive an offer with a pre-approval letter, feel free to ask these questions, okay? And lenders should be ready to answer them if they've done their job correctly. All right, that is all that I have for today. Please subscribe. If there are any other questions in there that you use as an agent that I didn't list here, feel free to write them into the comments that other agents can start using. That's it, and uh, we will see you next week. Thanks. Bye.