Are You Pre-Approved ... or Not?
Pre-Approval VS Pre-Qualification
If you take a look online, you can easily find multiple definitions and opinions on just what constitutes a Mortgage "Pre-Qualification", "Pre-Approval", and "Pre-Approval Letter" and the differences between them ...
So that said, as a Mortgage Originator, when first contacted by a potential Borrower, I must ask (along with other things) what that client knows about the mortgage process as a whole, what they know regarding Pre-Qualifications and Pre-Approvals ... and to ascertain which (Pre-Qualification or Pre-Approval) best fulfills their need(s), both in the short-term and long.
If trying to find out what financing or home buying options they may or may not have at their disposal ... or just hoping to spruce up their credit standing for future buying ... Pre-Qualification may fulfill their needs. But if they're wanting to buy soon, or have an actual home in mind for purchase, most often, Pre-Approval serves their immediate purpose better.
So what are the steps needing to be taken to obtain a Mortgage Pre-Approval and Pre-Approval Letter?
The process to receive a Pre-Approval Letter typically includes the following:
- A client is hoping to buy or refinance a home
- That client has contacted an Originator (me) to be qualified for mortgage financing
- That client hopes to secure a Pre-Approval Letter stating that they are financially qualified to buy/refinance a home and successfully complete the financing process to do so
- The client provides me info (and hopefully supporting documentation) for the purpose of submitting that info to automated underwriting
- A Pre-Approval Letter is provided to the client
I've found that sometimes the terms Mortgage Pre-Qualification and Pre-Approval ... and their definitions ... seem "muddy" or hard to differentiate between by new clients entering t1he home buying and financing process. Their confusion often surrounds:
- Just how literally can a Pre-Qualification or Pre-Approval/Pre-Approval Letter be taken?
- What assurances are gained from obtaining each?
Now, to be sure, there's a legal definition for each term. (See links above) But I find it's the term Pre-Approval/Pre-Approval Letter that garners the most interest from potential Borrowers/Buyers and is increasingly requested by them (versus a Pre-Qualification).
It's my opinion that Pre-Approvals are the preferred choice and more reliable for Buyer/Borrower's (and Seller's) sake when an actual Real Estate Contract is being negotiated. That reliability is anchored in the fact that a more thorough scrutiny (and often automated underwriting) conducted by the Lender.
It must be pointed out though that a Mortgage Lender does protect themselves during this portion of the process, as Pre-Approval Letters do include an "out" or ability for the Lender to withdraw or cancel a Pre-Approval. The "out" comes into play should any of the discussed terms within the Letter change after more detailed data is learned ... either about the Borrower(s) or the property being proposed for financing.
You'll find some examples of changes or misinterpretations that will null a Lender's Pre-Approval below:
- Variances in the Borrower(s) actual length of employment: Dates regarding when a Borrower worked at a current or former Employer
- Variables in Borrower(s) pay:
A. HOW they get paid
B. Actual number of hours worked
C. Actual rate of pay
D. Figures regarding Unreimbursed Business Expenses
E. Discrepancies surrounding Commission or Bonus
- Gaps in employment: Gaps not previously reported and only verified by an Employer's Human Resource Department after the Mortgage Application is taken
- Classification of employment: Learning that a Borrower(s) is Self-Employed or Independent Contractor VS a salaried or hourly-wage employee
- Funds to Close: Funds are found to be either in part or full from "cash on hand" with no verifiable means of documenting the source of the funds
- Large Deposits: Large Deposits are made into the Borrower(s) accounts for the Closing Funds and Down Payment. The funds cannot be sourced by traditional income or transfer of other assets from other accounts
- Property Type: The Property Type is not reported correctly (Example: What was reported as a Townhouse is actually Condominium Ownership and not approvable by FHA, Fannie Mae, or VA, as a Condo)
- Loan Specificity: A specific loan program intended to fit the criteria of the loan scenario is discontinued or a Borrower(s) income or DTI (debt-to-income ratio) can't meet the specific requirements of that program ... and no other financing options are available
- More ...
When any of these instances occur and a Pre-Approval is canceled by the Lender, it's often not received well by client or agent ...
The basis for the Lender's withdrawal of the Pre-Approval is often viewed as an "excuse". It's seen as info that should have been obtained, known, or raised as a potential problem by the Originator earlier in the process ... or anticipated because of the Originator's past work experience.
In some cases, that is correct. But even experienced Originators cannot know everything and make mistakes.
While I still have a large number of clients that reach out to me via phone, email, text, and social media ... in a growing number of my files, Borrowers are themselves completing electronic filings for Pre-approval online. While there can be an advantage for clients, it can have negative results too.
How?
Sometimes Borrowers misinterpret or answer a question on the online application incorrectly and unknowingly. In these instances, the obtaining of subsequent digital or paper copies of documentation, credit reports, statements, job histories, etc., later reveal a discrepancy, error, or misunderstanding made.
So it's vitally important for Mortgage Applicants to know: Documentation subsequently provided to the Lender is where the all-important difference between Pre-Qualification and Pre-Approval resides ...
As an Originator, I'm lucky ...
The majority of my mortgage clients come to me as a "warm lead". That meaning that their agent, attorney, accountant, friend have worked with me in the past and recommended my services. They're a bit more well-versed and it's been explained that they need a Pre-Approval Letter before they can start their home search. That gets us off to a positive start.
Still, my clients arrive in varying stages of readiness to buy. Some are more informed than others and have an idea of what the mortgage process holds for them.
Others know their credit scores because they performed a search prior to our speaking. Or they gained their scores via a free monthly credit card service. They may have a vague idea of what they can afford or a monthly payment they're hoping for.
But it's rare that valid proof of income is in hand when we first speak or available to me at that time. Valid proof meaning pay stubs, W-2's, Tax Returns submitted, down payment fund verified by bank statements, retirement account statements, investment funds, proceeds of a sale of property, etc. (For a complete listing of documentation needed at the time of application, click HERE).
Such was the case when I spoke to clients late in the day on Saturday this past weekend ...
We had talked prior to that call, but it had been months. They were in their car. They'd been out viewing homes and they'd found one they really liked.
Their question to me? How quickly could I provide them with a Pre-Approval Letter so they could place an offer on the home? Their agent was demanding it.
Time was of the essence for these Buyers and they did receive a Letter ... but it was a Pre-Qualification Letter, as it was provided without any income or asset verification to support our initial discussions. It's not the scenario I recommend to my clients or agents.
This is just one of the many scenarios an Originator can face when receiving requests for Pre-Qualifications and Pre-Approvals. There are always many moving parts to each request and varying timetables to negotiate.
While there is no 100% foolproof guarantee that a Pre-Approval will turn into a Loan Commitment and Cleared to Close ... Pre-Approvals remain the closest thing to being so. It's a wise Borrower that communicates with their Originator early, consistently, and thoroughly and allows their Mortgage Originator ample time to conduct the process needed to provide one.
There is so much to gain by taking early proactive steps ... certainly credit and financial-wise. But also in reduced stress.
So get started on your Pre-Approval early. Contact me immediately upon making your decision to buy. Don't wait until you're ready to view homes.
You'll be glad you made the decision and the effort ...
* Hoping to Buy or Refinance a Home or Investment Property in New Lenox, elsewhere in the Chicago - Chicagoland area, IL or WI?
I'll put my 40+ years of Mortgage experience and expertise hard to work on your behalf.
I'm easily found at:
Gene Mundt
Mortgage Originator - NMLS #216987 - IL Lic. 031.0006220 - WI Licensed #216987
American Portfolio Mortgage Corp.
NMLS #175656
Direct: 815.524.2280
Cell or Text: 708.921.6331
eFax: 815.524.2281
Gene Mundt, Mortgage Originator, a Mortgage Originator with 40+ years of #mortgage experience, that will offer you exemplary mortgage service and advice when seeking: #Conventional, #FHA, #VA, #Jumbo, #USDA, and Portfolio Loans in #Chicago and the greater Chicagoland region, including: The #Lincoln-Way Area, #Will County, (#New Lenox, #Frankfort, #Mokena, #Manhattan, #Joliet, #Shorewood, #Crest Hill, #Plainfield, #Lockport, #Channahon, #Bolingbrook, #Romeoville, #Naperville, #Wilmington, #Peotone, etc.), #DuPage County, the City of #Chicago, #Cook County, and elsewhere within IL and Wisconsin.
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