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Fast Money? Not So Fast

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Posted On: 06/14/2017

Question: We received a letter from a major lender that says we’ve been prequalified to refinance. Since we already qualify for financing, if we say yes will the lender simply schedule closing and give us a check?

Answer: Unfortunately that's not how the system works.

To understand why, go back to the lender's letter. It surely says on the front that you are prequalified to refinance your home. However, if you look very carefully, you will see that the important point about the letter is not the term “prequalify” – it's the asterisks and fine print. In that fine print it will say you’ve been “prequalified” for financing but not actually able to get a loan.

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What happened here is the lender got your name from a credit bureau, data broker or other source. On the basis of your credit score and other factors the lender then sent you an offer to sell you a loan.

Keep looking with that magnifying glass and you will see that the offer is not without conditions. Before giving you a penny, the lender must determine you have the ability-to-repay the loan. That means while you qualify to get the lender's offer, you may not qualify for the actual financing being offered.

What more is required? Nothing less than a full-blown mortgage application.

But wait – there's more.

Even if you meet all the financial standards required by the lender, you still may not qualify for financing. That's because the lender will want to get the property appraised to assure that it has enough value to justify the mortgage. There must be a certain loan-to-value ratio (LTV), say 80 percent.

For example, imagine that the property can be appraised at $200,000. If the lender will provide financing equal to 80 percent of the property's value, a qualified borrower can get a $160,000 mortgage.

You might see that the lender's letter says that not only do you prequalify for a given rate you also prequalify for a given amount. But – again – take a close look at the letter. No doubt it says somewhere that the rate is subject to change. Also, that loan amount mentioned in the letter may require a certain LTV. If the lender says it will only accept a 70 percent loan-to-value ratio – an extremely conservative LTV that assures the loan is virtually risk-free – then you will get a much smaller loan than would be the case with 80 percent or 90 percent financing.

If the letter is interesting, if you think now is a good time to refinance given today's rates, that's fine. Use the prequalification letter as a benchmark, speak with a number of local lenders, and see what options are available to you.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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