Most real estate deals don’t die at the starting gate.

They die at the finish line.

And the reason they die at the finish line is because someone thought they had been “approved” when, in fact, they hadn’t really been “underwritten” at all.

This is from personal experience as the former CEO of a mortgage company and as an investor myself:

There’s a huge difference between “pre-qualified,” “pre-approved,” and “underwritten.”

And if you don’t understand the difference, you’re the risk.

Pre-Qualified: Just the Chat

Pre-qualified really means someone asked you some basic questions about income and debt.

Maybe they pulled some credit reports. Maybe they didn’t.

They didn’t verify any income or assets.

They didn’t review any tax returns or bank statements.

It’s really just the “chat” version of trying to figure out how much house you can afford.

Good for looking at Zillow on a Sunday afternoon.

Bad for writing actual contracts.

Pre-Approved: Slightly More Accurate

Pre-approved really means:

Credit reports pulled
Income information reviewed
Automated underwriting

Most lenders use some sort of automated system:

Fannie Mae’s Desktop Underwriter (DU)
Freddie Mac’s Loan Product Advisor (LPA)

These programs use algorithms to approve the loan.

But here’s the problem:

If the information fed into the program was bad or incomplete,

The “approval” will fall apart when the actual underwriter reviews the file.

And the actual underwriter reviews the file about 10 days before closing.

Fully Underwritten: This Is What Actually Works

Fully underwritten really means:

Income verified
Tax returns reviewed
Assets verified
Assets sourced
Debt ratios confirmed
Employment validated
Conditions cleared
A human underwriter has reviewed the file and signed off.

This is what gives you the leverage in the marketplace.

When we’re talking about tight inventory markets, we’re talking about Southern California markets like Claremont, Upland, or La Verne. Sellers in those markets don’t want “maybe buyers.” They want buyers who are going to buy the home, and they want that buyer to have the necessary documentation in place.

They want certainty, and certainty wins.

Why Deals Fail Late

This is what I see kill loans at the finish line:

– Declining income year over year
– Write-offs from self-employment
– Undisclosed debts
– Large unexplained deposits
– Bonus income not averaged correctly
– Incorrectly calculated rental income
– Issues with trust-owned property
– Incorrectly calculated debt-to-income ratios

And the problem is, the borrowers have no idea this is going on.

And the problem is, the loan officers have no idea this is going on until it’s too late.

The Real Problem

The problem is, the industry rewards speed over accuracy.

Loan officers want you to shop fast.
Realtors want the offer written yesterday.

And no one wants to slow down and stress test the file.

And when it does blow up, it blows up in the middle of the escrow process.

That’s when the earnest money is on the line.
That’s when the rate locks expire.
That’s when the sellers get upset.

How We Do It Differently

We don’t treat the pre-approval process like a marketing gimmick.

If you’re going to buy, we’re going to underwrite the file upfront.

So what does that mean?

It means we’re going to:

– Review the documentation
– Use conservative numbers
– Stress test the income
– Validate the assets
– Structure the file correctly

It takes a little more work upfront.

But it eliminates the surprises.

And the surprises are what kill people’s deals.

Investors: This Applies to You Too

If you’re investing in rental properties or BRRRRs, this matters even more.

Conventional financing guidelines, as established by Fannie Mae and Freddie Mac, are very strict on:

Rental income calculation
Reserves
Property requirements
Condo warrantability
Self-employment requirements

And if you’re stacking deals, your debt ratios will tighten fast.

One miscalculation can mean failure for your refi plans.

And what about when you want to pull money out for the next deal?

You want to make darn sure the numbers work.

Bottom Line

Pre-qualify: conversation
Pre-approval: software
Underwriting: reality

If you’re looking at a new house, especially in competitive markets, it’s time to stop asking:

“Am I approved?”

And start asking:

“Is my file fully underwritten?”

Why? The worst time to find out you’re not approved…is 10 days before closing.

Want to get your file stress tested the right way?

Reach out.

Structure wins. Certainty wins. And in today’s market, certainty gets deals done.