AT ONE TIME, A PRE-APPROVAL LETTER FROM A lender was considered almost as good as cash in hand. It told a builder that a buyer's income, employment, assets, and debts had been checked out and that the buyer had been pre-approved for a mortgage of a certain dollar amount. But today, builders and real estate agents view such letters with a healthy dose of skepticism. Mortgage providers often base the letters strictly on what the buyer has told them without verifying the information and fill the letters with conditions and qualifiers that can make them essentially useless.

In a recent survey of more than 1,700 real estate professionals conducted by Campbell Communications for Inside Mortgage Finance Publications, 51 percent said that unreliable pre-approval letters were the most significant issue with mortgage providers. When broken down by lender category, the agents responded that 39 percent of letters provided by Internet lenders were faulty because borrower information hadn't been verified. Letters from mortgage brokers were invalid 27 percent of the time, followed by 19 percent of letters from national lenders, 14 percent from local banks, 10 percent from credit unions, and 9 percent from an agent's mortgage partner.

“A pre-approval letter is a total of nothing,” says Kathy Courtney, director of sales and marketing for William Lyon Homes in San Diego. “It's a nightmare.”

Part of the problem, Courtney says, is that the hot real estate market has put pressure on lenders to do whatever it takes to get a deal.

“It's a very competitive business,” she says. “There are [lenders] out there who say, ‘If I can just get them hooked, I can keep them.' ”

West Virginia–based mortgage broker Marc Savitt says he would much rather take an application, verify all the information, and issue a commitment letter based on that process. But many real estate agents don't want to show a property to someone without a pre-approval letter; they could be wasting their time with someone who could never qualify for a mortgage. So they pressure lenders to provide the letters.


“A pre-approval letter is a glorified pre-qualification,” says Savitt, a board member of the National Association of Mortgage Brokers. “Anything can change. That's the problem. When it does, the lender gets the blame.”

To address the problem, William Lyon Homes requires all buyers to be approved by its in-house lender, Courtney says. They can use any lender they want, but the process ensures that borrowers will qualify for a mortgage—and provides a backup plan if their outside financing falls through at the last minute.

In the survey, 80 percent of the agents responded that if a standardized pre-approval letter were available from a national organization, such as the National Association of Realtors (NAR), they would probably recommend that lenders use it.

That would be helpful, says Dick Gaylord, the 2006 first vice president of NAR. With so many lenders creating their own letters, it's impossible to gauge what the information means.