The imminent death of the prequal letter
The prequalification letter is set to fade into mortgage oblivion and its death is long overdue.
The self-serve process of calculating buying potential and the resulting letter have long been part of the lending universe, but their use and effectiveness have never been more than instant gratification and an enticement to go further in the loan application process.
The majority of borrowers entering the home buying market know that getting preapproved is part of the process, and most start off by educating themselves on various bank and financial websites, taking advantage of free home buying calculators, and reading up on financial blogs.
Now don't get me wrong — it's great for borrowers to go on the internet unhindered to educate themselves on the process of home buying and get a sense of what they may qualify for. There is no issue with this.
What does create a problem, and where we do our potential customers a disservice, is the resulting prequal letter provided to a consumer in the process of said online inquiry and education.
And because there's no industry-wide standard or definition for what prequal, preapproval, etc., actually are, many borrowers enter the market with a document that is ambiguous at best, comprised of more disclosure and legal disclaimers than useful substance.
So while many loan officers and Realtors agree that prequal letters are worthless, why have they existed for so long?
One reason is they're a great way to move borrowers from casual tire kickers to committed applicants.
Typically borrowers who start off with a lender (and more and more are starting autonomously and online) stay with that lender. The instant gratification and thought of getting something without having to give too much information can compel a shopper into going through the entire application process.
Keep in mind that the only required information on many prequal sites is the borrower's phone number and email address, and with a little follow up, an initial prequal can easily turn into a preapproval and ultimately a funded loan.
So if it's time for the prequal letter to fade off into mortgage obsolescence, what's there to replace it? What can satisfy a borrower’s need for non-committal instant gratification, provide a reliable snapshot of what they can actually afford, and entice them to commit to working with a specific lender? The answer lies in validating borrower data at the point of initial application.
Don't get me wrong — if borrowers want to use a lender's website or online tools for mortgage education and scenario purposes, that's fine.
But if we are then allowing that person to walk away with a letter to enter the marketplace, we should be taking the extra step and validating in some way that the information contained in the letter is accurate.
Today, there are scores of verified data sources (many like Equifax's The Work Number and Form Free that you've most likely heard of, and plenty more you probably haven't) available for lenders to obtain applicant income, credit and asset information.
Also, both Fannie Mae and Freddie Mac have rolled out programs encouraging lenders to use source data in lieu of paper documents.
While verified data services have been available for some time, most are currently used downstream in the mortgage process — usually to validate/verify documents a borrower has already provided to their lender.
As an industry, we need to be moving these services upstream into the borrower experience and plugging them directly into the application.
Think about it — if I'm already asking a borrower how much money they make, why shouldn't I go ahead and ask their permission to automatically and securely verify their income and employment data through an agency-approved service?
Leveraging verified data at the point of sale: a) gives a borrower a truer sense of what they actually can afford, b) removes the need to collect paper documents later on in the process, c) gives the lender and investor validated data on the spot, and d) provides the borrower with a document that can actually be taken seriously in the marketplace.
In an age where consumers want to be able to perform all aspects of home buying in a manner that is consistent with shopping for other goods and services, it's time we put the technology we have at our disposal to good use.
If we're willing to make some changes and adapt to the current environment, we can provide the fast, simple and seamless experience modern consumers crave.
Lenders who want to be part of the future must do a better job of meeting rising consumer expectations, which are evolving every day. This was a key theme industry executives discussed recently at MBA Annual, and we won't stop hearing about it anytime soon.
I expect to see financial institutions integrate more and more digital technology in 2020 and beyond. As we continue on this journey as an industry, the old-school prequalification letter should be one of the first out-of-date practices to which we bid adieu.