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:
One. 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
Two. 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.’
Great post Ross.
First Thought: People actually read pre-approval letters!? Based on some of the phone calls I get, this is a shocker.
Second: I think it is important that people understand the limitations of a guaranteed approval.
The problem with "Guaranteed Approvals" may be more properly described as one of dubious expectations rather than a dubious guarantee.
In other words, nobody should confuse a guaranteed approval letter with a "we guarantee that this purchase will happen letter."
Those are two very different statements. The former means something real, the latter is pure fantasy.
All a guaranteed approval does is eliminate a single variable – and the only one that the approving lender can control.
More simply: It guarantees the borrower is good. Nothing more, nothing less, nothing dubious.
I would love to be able to say deals seldom die because the borrower has not been properly vetted, but I have had too much experience trying to mop-up after bad pre-approvals (issued by others) to make such a statement with a straight face.
And even then there are limitations: A borrower could lose a job between contract and closing. A borrower could commit fraud to obtain a pre-approval. A borrower could spend their cash for closing on new furniture and put it in a storage unit.
[all true, first-hand stories, by the way.]
Also worth knowing:
We created the guarantee to counter sloppy industry practices, not as a reputational prophylactic for RMG.
You know who pays the $10K? The loan officer who signs the approval letter. The check is to be affixed to their letter of resignation.
So at the very least one knows that there is a Loan Officer on the other side who's incentives are properly aligned.
Alex:
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!