Minneapolis, MN:  We are starting to see them pop up everywhere, mortgage companies,  mortgage brokers, and lenders, making these great sounding mortgage closing guarantees, where they make claims of paying $500, $5,000, or ever $10,000 guaranteed if they don’t close your loan, or if they don’t close on time.

These offers vary from lender to lender, but the basics are the same. Claiming to pay someone if something happens. Some claim to pay the seller if the deals falls apart. Some claim to pay the Realtor, some claim to pay the buyer, some claim to make your first house payment.

As with so much in life, it is probably smart to look at these claims and offers with a bit of a skeptical eye. So let’s us take a look at what they are all about.

The first thing to ask is if they are real, with the answer generally being yes, but with the caveat that there is so much small print, that they can make these claims, because they never ever expect to pay them!

The reality is these guarantees are nothing but marketing ploys to get you to select one lender over another, and most of them come with a price.

The Loop Holes

These claims are incredibly low risk for the lender because in order to offer them, they simply do a complete loan underwrite of your application, except for the appraisal report, and title commitment, both of which can’t be done until after you’ve made a successful offer to purchase.

All of the guarantees have so many loop holes, time parameters, and requirements, that no lender ever expects to pay.  For example, common items are things like; you must find a home within 30-days, or you must close within 60-days. You may not go a penny over your pre-approved purchase price, or monthly payment. No material changes to your application allowed; like changing jobs, or changes to credit score. Basically no changes to anything. They will also say the purchase agreement must be OK, the appraisal must be “acceptable” and that the title search must be “acceptable”.

They also say they won’t pay if you don’t provide documents in a timely manner, fail to sign documents and disclosures in a timely fashion, fail to disclosure information, and a litany of other reasons.

Many of these offers also come with loan program or property type exceptions. You’ll see things like no FHA Loans, no USDA loans, reverse loans, first time home buyers with down payment assistance, or refinances. Typically just standard 30-yr fixed. You’ll also see restrictions of no short-sales, no foreclosure properties, no brokered loans, and even no jumbo mortgage loans.

Oh, and don’t forget third parties too… For example, lenders have no control over appraisers, so if the appraisal takes too long, there is a loop hole for that too.

Restrictions apply covers ever single possible reason a loan would not close, or not close on time, essentially rendering the guarantee worthless. Yup, the small print matters.

The Guarantees Negatives

OK, but what is wrong with the claims?

Nothing, but gimmicks are gimmicks. Just because they make a guarantee claim, does this make them the best interest rate? How about the lowest closing costs? Does this mean you are getting the best loan? Does this mean the Loan Officer is experienced?

Paying a higher interest rate, or higher closing costs, and especially being put into the wrong wrong program by an inexperienced Loan Officer in not exactly smart in exchange for a fluffy offer that will never be paid if something were to go wrong.

The sad reality is lenders know most people fall for gimmicks, and never read the small print. They use that as a tool to make more money with higher rates and costs. Sad… 

For Real Estate Agents, there is a down side too.

I was recently at lunch with an agent who advised their client to accept the offer from buyer who was using a company with one of these offers, making note that if the transaction fell apart, they were guaranteed $5,000.

When that deal actually did fall apart, and the lender refused to pay because of some of the aforementioned loops holes, the seller fired the agent because the agent talked highly so highly about the guarantee, and had the seller only accept offers from buyers pre-approved from the company with the guarantee.  Oops.

Two Types of Mortgage Pre-Approval

Fast and pretty darn good, or slow but super accurate?  It’s your choice.

In order to offer these guarantees, the lender offering it must do a full and complete underwriter reviewed loan approval on the front side. This means you must complete a full application, submit all your paperwork, meet any and all additional conditions, plus wait for job and IRS tax return verification’s to come back.

This means the typical person will have to wait roughly two to three weeks or longer after loan application before being issues a standard Pre-Approval Letter. This assumes the person submits all their requested documents quickly, and the lender gets their job verifications, IRS verifications and more back quickly,

While there is nothing wrong with this, and it is actually the better way to go, it can cause real issues if you fall in love with a home before the pre-approval is ready, or you are otherwise trying to make a quick offer. The home can be long gone while you wait for the Pre-Approval.

Historically, most home buyers situation are pretty straight forward, so a basic traditional Pre-Approval can be very quick, and very accurate. Walking into my office and leaving with a Pre-Approval Letter is common. This faster pre-approval is still by far the most common way lenders do pre-approvals, and provides you with better deals.

Why Standard Pre-Approval Equals Better Deals for You

It is simple math. It takes a significant amount of people, time, and expense to approve a mortgage loan.  Loan Officer, Processors, Underwriters, and more. Lenders also have to pay for IRS 4506’s,  fraud reports, and job verifications. If every single loan application turned into an actual closed loan, this would be fine. But they don’t. Many people don’t qualify, and many more actually never end up using that specific lender or ever buying a home.

All the extra staff and expense to complete full underwriting reviews for deals that never close really adds up. The cost of course gets passed along to the consumer with higher rates and fees.

The Bottom Line

The bottom line is feel free to pick whatever lender you want to work with, but don’t pick them just because of marketing gimmicks, and worthless guarantees – especially as they usually come with higher rates and costs.

We here at Cambria Mortgage typically do the fast traditional Pre-Approval, but will happily offer the slower full Underwriter Pre-Approval if something in your file may lead us to question a final approval, or if you simply ask.  Its Always Your choice…