WILTON, Conn. – May 7, 2018 – It’s common advice: Buyers should obtain a mortgage preapproval letter from a lender before going out with a real estate agent to look at homes. The rationale is that a preapproval shows, in writing, an amount of mortgage money a buyer is qualified to receive, all but guaranteeing the price range the buyer can afford.

For real estate agents, that preapproval letter is an assurance that they’re not wasting time on clients who may not be able to afford the homes they’re considering, only to face a harsh reality during the transaction.

But that’s flawed thinking.

A preapproval letter is not a loan commitment, which most real estate professionals understand.

But equally important: A preapproval doesn’t identify potential issues or “red flags” that may prevent a loan from closing. At best, a preapproval letter indicates that the lender is interested in providing financing to your client. At worst, it provides a false sense of security.

It’s analogous to a home purchase transaction with a clause noting that the entire deal is dependent on the buyer’s ability to sell another property first. How many people would consider that type of scenario advantageous?

Preapproval also doesn’t take into account potential changes to a buyer’s financial situation, which could affect their loan offer. While a buyer may think their budget can easily support a downpayment and monthly mortgage bills, a lender’s guidelines may show otherwise. If certain income or assets are not stable and continuous, then they are not considered verifiable, such as income from being self-employed. And if they’re not verifiable, the lender removes the income or assets from the loan application – which frequently results in a loan denial.

This doesn’t mean there’s no value in requesting that buyers obtain preapproval letters from their lenders, but real estate agents should be aware of the red flags that lurk in the financial landscape of many buyers and offer guidance on how to correct them. These red flags may surface in credit reports, income documents or asset account statements – and when they surface, they can be lethal to a real estate deal.