Start shopping for a house and inevitably someone will suggest you visit a lender and find out how much house you can afford.

That visit generally results in a pre-approval letter from the lender. It's an important document because in hot real estate markets, many agents won't even show a house without some indication that the buyer can get financing to close the deal.

Unfortunately, a pre-approval letter may give both the buyer and the seller a false sense of security because in many cases, the lender hasn't verified the buyer's information. The letter is loaded with so many qualifiers and conditions, it winds up meaning very little.

In a survey of more than 1,700 real estate agents and brokers about their relationships and attitudes toward mortgage providers, more than half of the agents said faulty preapproval letters were their top complaint with lenders.

Comments by survey participants to Campbell Communications, which did the survey for the trade publication Inside Mortgage News, made it clear that many of them didn't think the letters were worth the paper they were written on.

Lacking any legal recourse, real estate professionals are taking matters into their own hands.

Denny Grimes, a real estate agent in the hot Fort Myers, Fla., real estate market, has had so much trouble with pre-approval letters that if he's representing the seller, he has a clause in his sales contract saying he has the right to review and approve the letter.

"If we don't like how it's written, we'll invalidate the contract in three days," Grimes says. "We're getting fed up. The letters are so generic. They're saying, 'Based on what this guy has told us, he's good for a mortgage.' You get into it and do some more discovery and they're not. It really ruins the buyers' and sellers' lives."

William Lyon Homes, a California-based builder, dealt with the issue by requiring all the buyers to qualify with his in-house lender, William Lyon Financial Services. They don't have to use the lender, but at least that way, the builder knows that the buyer will qualify for a mortgage.

He established the policy because too many lenders are willing to tell customers what they want to hear to keep the deal.

"I've heard guys say, 'I'll stamp out letters in the back room; I don't care. There are so many programs, they'll qualify for something,'" says Todd White, division manager for William Lyon Financial Services.

"There's an ethical issue you have to address in being truthful with your buyers. You have to deliver good news when you have it and bad news when you have it. Tell them what you can and can't do."

Of course, lenders aren't the only ones who are so anxious to get a deal closed that they're willing to take a few shortcuts. Buyers often aren't accurate in reporting their income, assets and debts.

Part of the reason for that is the explosion in the number of lenders, says Valerie Patterson, senior producer of the Wall Street Journal's online real estate section, Realestatejournal.com.

Ten years ago, buyers were more likely to have a face-to-face meeting -- and some kind of relationship -- with their lender. Today, with so many lenders going online, it's easier for some buyers to think they can sneak one by the broker.

Either way, the result is that real estate agents don't take the letters at face value anymore. That puts the onus on the buyer to make sure their preapproval letter is as specific and revealing as possible, Patterson says. That will be valuable in a seller's market, where the listing agent will present the offer that has the best chance of going to closing.

How can a home buyer know if his preapproval letter accurately reflects his ability to get a mortgage? The amount of work that goes into creating it is a huge indicator of its value, says Bob Walters, chief economist for Quicken Loans, one of the country's leading online lenders. Ask the lender what kind of information is needed for the letter. The list should include pay stubs, your most recent bank statements and tax returns.

"If they say, 'Nah, I don't need anything from you,' you should have some concerns," he says.

Quicken takes a $500 good-faith deposit from a buyer to prepare a preapproval letter "and that doesn't come close to all the time and effort that's put into it," Walters says. The deposit is refunded at closing.

As much as buyers might not want to pay a fee for a preapproval letter, it is an indication of the quality of the document, says Jay Brinkmann, vice president for research and economics with the Mortgage Bankers Association. "Absent any verification and commitment from the borrower that you'd ever see them again, (the letter) tends to be cursory."

Unless the buyer or the real estate agent is willing to cover the lender's cost of verifying all the information, the letter produced will be a "best opinion."

That's when the real estate agent becomes the best line of defense, whether he represents the seller or the buyer, says Dick Gaylord, a Realtor with RE/MAX in Long Beach, Calif., and the 2006 first vice president of the National Association of Realtors. When he's working with a buyer, he works with the lender. When he's the listing agent, he follows up with the lender to confirm as much information as he can before he presents an offer to his seller.

"I tend to be very demanding when it comes to a preapproval," he says. "You could call a lender today and say, 'I want to buy a $500,000 house,' and he'll ask you some questions, but he might not check anything. I want the lender to check the credit report, verify the bank statements and verify employment. It's never foolproof, but we save a lot of problems by having a letter with some substance."

S

art shopping for a house and inevitably someone will suggest you visit a lender and find out how much house you can afford.

That visit generally results in a pre-approval letter from the lender. It's an important document because in hot real estate markets, many agents won't even show a house without some indication that the buyer can get financing to close the deal.

Unfortunately, a pre-approval letter may give both the buyer and the seller a false sense of security because in many cases, the lender hasn't verified the buyer's information. The letter is loaded with so many qualifiers and conditions, it winds up meaning very little.

In a survey of more than 1,700 real estate agents and brokers about their relationships and attitudes toward mortgage providers, more than half of the agents said faulty preapproval letters were their top complaint with lenders.

Comments by survey participants to Campbell Communications, which did the survey for the trade publication Inside Mortgage News, made it clear that many of them didn't think the letters were worth the paper they were written on.

Lacking any legal recourse, real estate professionals are taking matters into their own hands.

Denny Grimes, a real estate agent in the hot Fort Myers, Fla., real estate market, has had so much trouble with pre-approval letters that if he's representing the seller, he has a clause in his sales contract saying he has the right to review and approve the letter.

"If we don't like how it's written, we'll invalidate the contract in three days," Grimes says. "We're getting fed up. The letters are so generic. They're saying, 'Based on what this guy has told us, he's good for a mortgage.' You get into it and do some more discovery and they're not. It really ruins the buyers' and sellers' lives."

William Lyon Homes, a California-based builder, dealt with the issue by requiring all the buyers to qualify with his in-house lender, William Lyon Financial Services. They don't have to use the lender, but at least that way, the builder knows that the buyer will qualify for a mortgage.

He established the policy because too many lenders are willing to tell customers what they want to hear to keep the deal.

"I've heard guys say, 'I'll stamp out letters in the back room; I don't care. There are so many programs, they'll qualify for something,'" says Todd White, division manager for William Lyon Financial Services.

"There's an ethical issue you have to address in being truthful with your buyers. You have to deliver good news when you have it and bad news when you have it. Tell them what you can and can't do."

Of course, lenders aren't the only ones who are so anxious to get a deal closed that they're willing to take a few shortcuts. Buyers often aren't accurate in reporting their income, assets and debts.

Part of the reason for that is the explosion in the number of lenders, says Valerie Patterson, senior producer of the Wall Street Journal's online real estate section, Realestatejournal.com.

Ten years ago, buyers were more likely to have a face-to-face meeting -- and some kind of relationship -- with their lender. Today, with so many lenders going online, it's easier for some buyers to think they can sneak one by the broker.

Either way, the result is that real estate agents don't take the letters at face value anymore. That puts the onus on the buyer to make sure their preapproval letter is as specific and revealing as possible, Patterson says. That will be valuable in a seller's market, where the listing agent will present the offer that has the best chance of going to closing.

How can a home buyer know if his preapproval letter accurately reflects his ability to get a mortgage? The amount of work that goes into creating it is a huge indicator of its value, says Bob Walters, chief economist for Quicken Loans, one of the country's leading online lenders. Ask the lender what kind of information is needed for the letter. The list should include pay stubs, your most recent bank statements and tax returns.

"If they say, 'Nah, I don't need anything from you,' you should have some concerns," he says.

Quicken takes a $500 good-faith deposit from a buyer to prepare a preapproval letter "and that doesn't come close to all the time and effort that's put into it," Walters says. The deposit is refunded at closing.

As much as buyers might not want to pay a fee for a preapproval letter, it is an indication of the quality of the document, says Jay Brinkmann, vice president for research and economics with the Mortgage Bankers Association. "Absent any verification and commitment from the borrower that you'd ever see them again, (the letter) tends to be cursory."

Unless the buyer or the real estate agent is willing to cover the lender's cost of verifying all the information, the letter produced will be a "best opinion."

That's when the real estate agent becomes the best line of defense, whether he represents the seller or the buyer, says Dick Gaylord, a Realtor with RE/MAX in Long Beach, Calif., and the 2006 first vice president of the National Association of Realtors. When he's working with a buyer, he works with the lender. When he's the listing agent, he follows up with the lender to confirm as much information as he can before he presents an offer to his seller.

"I tend to be very demanding when it comes to a preapproval," he says. "You could call a lender today and say, 'I want to buy a $500,000 house,' and he'll ask you some questions, but he might not check anything. I want the lender to check the credit report, verify the bank statements and verify employment. It's never foolproof, but we save a lot of problems by having a letter with some substance."

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