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Wednesday, December 1, 2010

"Guaranteed" Pre-Approval Letters

Porous Guaranty; or, "But, Can You Take it to the Bank?"

I feel the same way about "guaranteed" Pre-Approval Letters that I do about "guaranteed" pizza delivery or promises of "on-time" service calls by my cable company:

a) Officially dubious; and
b) Reminded of the reason companies (often) need to offer such promises in the first place, i.e., reputations for lacklustre and/or tardy service.

Standing Out From the Crowd

Which isn't to say that I don't understand what the lender is trying to accomplish.

Standard Pre-Approval Letters are widely understood to signify practically nothing.

In theory, they tell a Seller that the Buyer can afford to buy their home.

In practice, they commit the issuing lender to nothing, and are dispensed after obtaining the most basic information from the would-be borrower/home buyer.

Solving the Wrong Problem(s)

By contrast, as marketed by at least one local lender, a "Guaranteed Approval" loudly promises to pay the Seller an eye-catching amount -- $10,000 seems to be most common -- if the Lender fails to close the Buyer's loan.

The underlying message is clear: 'unlike the perfunctory financial screening performed by other lenders, we carefully qualify our Buyers.'

There are just two catches:

. All the conditions -- in fine print, naturally -- that invalidate the guaranty, including "if the property is deemed to be in a declining market or if the investor guidelines change prior to closing"; and

. The Buyer's financial wherewithal (or lack thereof) isn't what's causing deals to tank these days.

Rather, the biggest obstacles to deals now seem to be unrealistic offering (and asking) prices, followed by low appraisals.

In the first case, the Buyer and Seller never come to agreement on price.

In the second case, the Guaranteed Approval is moot, because the terms contained in the standard Financing Contingency allow the Buyer to walk.

Ultimately, the best way to regard a Guaranteed Approval is like chicken soup: 'can't hurt, might help.'


Ross Kaplan said...


I was wondering who paid the $10k.

Sorry for any insinuation that RMG is compensating for anything; I'm always delighted to handle a deal where the Buyer is using RMG, because I know there won't be a problem -- at least with the financing!

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