By Doug Goelz, Mortgage Services
You may have heard lenders talk about getting “pre-qualified” or “pre-approved” for financing and wondered what the difference is. Although there are no hard-and-fast definitions, “pre-qualified” often means a lender runs some numbers based on information you tell them (rather than on documentation you provide) and they let you know the financing for which you should qualify. You can go through this exercise online by entering your income, assumed credit score, and expected down payment into a mortgage calculator app. In reality, financing indicated by a pre-qualification is nothing but a guideline based on assumptions and offers no assurance of getting financing.
“Pre-approved” generally means that a lender has reviewed income and asset documentation you have provided, obtained your credit report, and run all the numbers to see how much financing you should be able to get according to specific loan program guidelines. Your lender, such as your mortgage broker, is acting as a surrogate underwriter to make sure you meet all the loan criteria. Your lender also should be able to identify potential issues or questions that the underwriter (who is the ultimate decision maker on the loan) may have and which will have to be addressed.
Whenever I am pre-approving a client, I always require pay stubs, bank statements, and even tax returns in some cases, and I run my own credit report. If I have questions about whether the client will be able to get financing, I go to various lender officers, and even underwriters, to get them to review the information and opine on the likelihood of getting a loan. That way, when I write the pre-approval letter that will accompany an offer on a property, I have a high degree of confidence that the loan ultimately will be approved.
Sometimes, if income, credit, assets, and/or other factors don’t fit standard guidelines, it is possible to have a loan underwritten even before an offer is made (these are usually referred to as “TBD” loans). That way, an underwriter can research whether the income, credit, and/or assets will be satisfactory to meet the loan guidelines.
Why isn’t every loan underwritten before an offer is made? There are several reasons: some lenders will not underwrite loans until a complete loan package (including a ratified purchase contract) is submitted. Underwriters work on purchase and refinance loans before looking at TBD loans and it can take weeks to get an answer on a TBD loan. If any factor or assumption (price, loan amount, credit score, guidelines, or other information) changes by the time the complete loan package is submitted after the purchase contract is ratified, the underwriter’s ultimate answer may change. Sometimes underwriters need management approval for exceptions, and management generally will not approve exceptions until a complete loan package is submitted. Finally, once in contract, if another lender has better rates or a better program, you may switch lenders and start the underwriting process from scratch.
When your offer is accepted, your loan gets officially underwritten once you sign a slew of disclosures, complete a loan application, and provide a standard history of income and asset documentation (e.g., pay stubs for a month; two months of bank statements; 2 years of W2s or income taxes). The underwriter then reviews the loan file and gives the final approval.
Thinking of buying? Let’s talk about your situation and financing options. Feel free to get in touch with me at 415-730-4665 or [email protected] to discuss your situation.
