A comprehensive guide to identifying weak pre-approvals and protecting your deals from last-minute surprises

As a realtor, few things are more frustrating than watching a carefully negotiated deal fall apart at the last minute due to financing issues. While pre-approval letters provide some assurance, not all pre-approvals are created equal. Understanding the warning signs of weak pre-approvals can save you time, protect your reputation, and ensure smoother transactions for your clients.

The High Cost of Weak Pre-Approvals

Before diving into the red flags, it’s important to understand what’s at stake. When a deal falls through due to financing issues:

• Your seller clients may lose backup offers and face extended market time
• Your buyer clients risk losing their earnest money and dream home
• Your reputation as a professional who vets buyers properly can suffer
• Your commission and valuable time investment disappear

The good news? Most financing surprises are preventable with proper due diligence upfront.

Red Flag #1: The “Drive-By” Pre-Approval

What it looks like: A pre-approval letter issued within hours of the initial application, often without requesting supporting documentation.

Why it’s dangerous: These superficial approvals are based solely on the borrower’s stated income and assets without verification. They’re essentially worthless when it comes to actual underwriting.

Warning signs:

• Pre-approval was issued the same day as the application
• Borrower mentions they “just filled out an online form.”
• No mention of document verification or income validation
• Generic pre-approval letter with minimal specific details

What to do: Ask your buyer when they received their pre-approval and what documents they submitted. If they mention it was “really easy” or “super fast,” dig deeper.

Red Flag #2: Debt-to-Income Ratio Red Flags

What it looks like: Pre-approvals for buyers whose debt-to-income ratios are pushing the absolute limits of lending guidelines.

Why it’s dangerous: While a 43% DTI might technically qualify, it leaves zero room for error. Any additional debt, income changes, or appraisal issues can sink the deal.

Warning signs:

• The pre-approval amount seems unusually high for the buyer’s stated income
• Buyer mentions having significant monthly obligations (car payments, student loans, credit cards)
• Multiple recent credit inquiries suggest the buyer is shopping around desperately
• Buyer expresses concern about affordability but has a high pre-approval amount

What to do: Have an honest conversation about comfort levels and consider encouraging buyers to shop below their maximum pre-approval amount.

Red Flag #3: Employment and Income Inconsistencies

What it looks like: Pre-approvals based on unstable, unverified, or changing income sources.

Why it’s dangerous: Lenders will verify employment and income multiple times throughout the process. Any changes or inconsistencies can derail the loan.

Warning signs:

• Recent job changes or employment gaps
• Self-employed borrowers without two years of tax returns
• Commission-based income without a solid track record
• Bonus or overtime income that’s irregular or seasonal
• Multiple income sources that are difficult to verify

What to do: Ask detailed questions about employment history and income stability. For self-employed clients, ensure they have at least two years of tax returns and profit/loss statements.

Red Flag #4: Down Payment and Asset Concerns

What it looks like: Pre-approvals where the source of down payment and closing costs haven’t been properly verified.

Why it’s dangerous: Lenders must verify and source all funds. Gift money, borrowed funds, or assets that can’t be documented will create problems at closing.

Warning signs:

• Vague explanations about the down payment source
• Recently opened accounts or large deposits
• Mention of borrowing down payment from family without proper gift letters
• Cryptocurrency or other hard-to-document asset sources
• Insufficient funds for closing costs beyond the down payment

What to do: Ensure buyers understand that all funds must be sourced and documented. Large deposits should be explained and documented well in advance.

Red Flag #5: The “Shopping Around” Borrower

What it looks like: Buyers who have multiple pre-approval letters from different lenders or are constantly switching mortgage brokers.

Why it’s dangerous: Multiple credit inquiries can lower credit scores, and constantly changing lenders suggest underlying qualification issues.

Warning signs:

• Multiple pre-approval letters from different lenders
• Recent credit inquiries from numerous mortgage companies
• Buyer mentions previous loan denials or issues
• Unwillingness to commit to a specific lender
• Stories about “shopping for the best rate” that seem excessive

What to do: Understand why they’re shopping around and ensure they’re working with a reputable lender who can actually close the loan.

Essential Questions to Ask Mortgage Brokers

To protect your deals, establish a relationship with trusted mortgage professionals and ask these key questions:

Initial Qualification Questions

• “What documentation have you actually reviewed and verified?”
• “What is the borrower’s actual debt-to-income ratio with all obligations included?”
• “Have you verified employment and income directly with employers/tax returns?”
• “Are there any potential issues or concerns I should be aware of?”

Documentation and Process Questions

• “What documents are still needed for final approval?”
• “When will the loan file go to underwriting?”
• “What’s your typical timeline from application to closing?”
• “Have you identified any potential appraisal challenges?”

Deal Protection Questions

• “What conditions could cause this loan to be denied?”
• “Is there anything about this property type or location that concerns you?”
• “What’s your backup plan if the appraisal comes in low?”
• “How confident are you in meeting our closing timeline?”

Building Relationships with Reliable Lenders

Not all mortgage professionals are created equal. Build relationships with lenders who:

• Communicate proactively about potential issues
• Provide detailed pre-approval letters with specific conditions
• Have a track record of closing deals on time
• Are transparent about potential challenges
• Use conservative rather than aggressive qualifying approaches

Protecting Your Deals: Best Practices

For Every Transaction:

1. Get lender contact information and speak directly with the mortgage professional
2. Request detailed pre-approval letters that specify exactly what was verified
3. Ask about the timeline and get regular updates throughout the process
4. Verify funds and discuss any large deposits or unusual circumstances
5. Plan for contingencies and have backup options when possible

Red Flag Response Protocol:

When you identify red flags, don’t panic, but do take action:

1. Document everything – Keep records of all communications and concerns
2. Communicate with all parties – Inform sellers about potential issues early
3. Develop contingency plans – Have backup buyers or extended timelines ready
4. Work with the lender – Address issues proactively rather than hoping they resolve themselves
5. Protect your clients – Advise on realistic expectations and potential outcomes

The Bottom Line

While you can’t guarantee every financing approval, you can significantly reduce surprises by understanding these red flags and asking the right questions. Remember, it’s better to lose a questionable buyer early than to lose a deal at closing.

Your role as a realtor extends beyond showing homes and negotiating contracts. By properly vetting buyers and maintaining strong relationships with reliable mortgage professionals, you protect your clients, your reputation, and your business.

Take the time to understand each buyer’s financial situation thoroughly. Ask the tough questions upfront. Work with lenders who share your commitment to transparency and professionalism. Your future self (and your clients) will thank you.

At 8Twelve Mortgage, we’re committed to helping Realtors like you close faster, serve better, and grow stronger. When your clients win, you win — and we’re here to support that every step of the way.

📞 Let’s talk: (519) 722-2750
📧 janos.gregus@8twelve.mortgage
🔗 mortgageswithjanos.com/realtors-partnership

Remember: This information is for educational purposes and should not replace professional legal or financial advice. Always consult with qualified professionals for specific situations.