Managing Money : Pre-Approved Mortgage Has Advantages

Mary Witko and her husband want to buy a home. And with today’s hot Southern California housing market, they need every advantage they can get.

Their answer: A pre-approved mortgage.

Such a mortgage, in which a lender has committed to loan them a certain amount before they begin shopping, will allow them to know just how expensive a home they can afford. And proving that they have already qualified for a loan may be a valuable bargaining chip if they get into a bidding war with other parties.

“We wanted to know what we could spend before we actually went out and got our heart set on a property we couldn’t afford,” says Witko, a research assistant in Los Angeles for the California Assn. of Realtors. Also, she added, “I didn’t want to find a place, really want it and know I could afford it, and lose it to a person who (the seller) knows has the cash.”

With such advantages, pre-approved mortgages--which became generally available in the past two years or so--are gaining popularity, particularly in Southern California, where prices are rising quickly and competition among buyers for prime properties can be fierce. Some pre-approved mortgages may also allow you to lock in an interest rate for 60 to 90 days--a valuable tool in today’s environment of rising rates.

“If you make an offer and satisfy the seller that there are no contingencies as far as financing, you can more easily strike a deal,” says Eugene A. Crane, head of residential lending at Great Western Bank, which is test-marketing pre-approved loans in the San Jose area.

Pre-approvals may be particularly attractive if you are self-employed or have complex sources of income, says Forrest W. Pafenberg, director of real estate finance research for the National Assn. of Realtors. In such cases, a realtor--who traditionally has filled the role of telling buyers what they can afford--may have a hard time making an accurate estimate.

Pre-approved mortgages also may be attractive if you don’t plan to use a realtor or if you want a second opinion on what you can afford. Some realtors may give you referrals to lenders offering pre-approvals.

A small but growing number of mortgage bankers and other lenders offer pre-approved mortgages, although most appear to offer them on an informal basis, where you get just a verbal commitment rather than a written commitment. For example, Directors Mortgage Loan Corp., a Riverside mortgage banker, offers informal pre-approval commitments on a verbal basis, says company President Gary Anderson. Some lenders, such as Great Western, are test-marketing pre-approved mortgages in certain markets.

One of the biggest formal pre-approval programs is offered by CompuFund, a Pleasanton, Calif.-based firm that matches prospective buyers with lenders through a computerized loan information and origination network.

Through its computer programs, CompuFund analyzes buyers’ finances and issues commitments--for either fixed- or adjustable-rate loans--through one of several lenders that it works with. At no charge to borrowers, CompuFund will issue a HomeBuyer Express Card--in effect, a credit card--that signifies a commitment for a certain amount.

That commitment is good for 60 days, during which the interest rate on the loan is locked in. The commitments can be issued as quickly as in two hours, CompuFund claims, provided a borrower has sufficient documentation--such as pay stubs, bank account statements and tax returns--to prove his income and assets.

The only condition on the loan is that it is subject to an appraisal of the house, CompuFund Chief Executive Sig Anderman says.

Such a service sounds great. But not all pre-approvals--particularly informal ones--are rock solid. Informal pre-approvals may be subject to a number of contingencies other than an appraisal. In some cases, lenders may underestimate or overestimate your true borrowing power. Or you may have to meet with your lender to finalize the loan after agreeing to buy the house--only to find out that you really couldn’t qualify after all.

“It may give you a false sense of security,” says one lender.

Another drawback is that a pre-approved loan may not give you the best mortgage rate and terms. “To some degree, especially in a rapidly changing market, you may find the lender isn’t as competitive,” says Joel Singer, chief economist of the California Assn. of Realtors.

Fortunately, however, most pre-approval agreements don’t obligate you to use the lender issuing the pre-approval, experts say. For example, at CompuFund, about a third of the firm’s pre-approved customers end up not using the loans, Anderman says.

Bill Sing welcomes readers’ comments but regrets that he cannot respond individually to most letters. Write to Bill Sing, Personal Finance, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.