Buyers were prequalified and Still didn't get the Loan

Question: I listed my house a few weeks ago and had three offers, all with pre-approval letters, a must in this market. Things were progressing smoothly until the lender of the contract I selected would not give my buyer the loan, despite the pre-approval letter. What is the value of such letters, are they loan commitments?

Answer: Some in real estate may disagree with our view, but here goes: There is no standard definition of either a "pre-approval" or "pre-qualification" letter and neither should be seen as a loan commitment. For instance, what if a borrower has great credit but there are appraisal problems, property encroachments or title issues? What if a borrower suddenly buys a new car just before closing or misses a payment or two which adversely affects their credit score and they no longer qualify for the loan? Will a lender issue a loan commitment? Not hardly. What if the lender knows the “pre-qualified” buyer is a “marginal” buyer, but “thinks” he can get the loan to go through, eventually getting denied by the underwriters?

Pre-qualification and pre-approval letters -- are often called "hand holding letters" -- meant that a borrower has met with a loan officer. It usually means a credit report has been run and that prospective purchasers have some idea of how much they can afford. But, typically, a pre-qualification or pre-approval document is NOT an iron-clad loan commitment. Until a loan approval is given, there is no guarantee that the buyer will get the loan.

Is it good that borrowers met with lenders? Absolutely. The process alerts consumers to credit issues and suggests what's affordable -- and what isn't.