A mortgage loan pre-approval from a lender has gained more importance in real estate transactions than ever before. Mortgage lending has been affected the past several years with a heightened level of regulation in an attempt to prevent the types of abuses they believe created the real estate meltdown that began around 2008. Appraisal restrictions, underwriting standards and procedures have resulted in fewer buyers entering the home buying market. The environment often changes as the regulators seek a balance between a variety of factor in the economy and the housing market.
The difference between a pre-qualified and a pre-approval letter
A home buyer benefits by understanding the difference between these two documents. Theoretically, if two offers were equal in every respect and both were acceptable to the seller, except one buyer was pre-qualified and the other pre-approved, the seller would first consider the pre-approved buyer.
The difference between a pre-approval letter and a pre-qualification letter is that a pre-qualification letter has little value. Most lenders do not even run a credit report on a pre-qualification. The originator will ask the basic questions and provide a letter that states you can buy a home up to a certain value subject to obtaining the lenders standard underwriting approval. This scenario happens because the buyer, and sometimes the real estate agent does not realize the difference.
The pre-approval is a more rigorous qualification that includes a credit report and documentation on employment, accounts and more. A pre-approval letter states the customer is preapproved to borrow up to a certain amount, provided nothing changes in their financial condition from the date of the letter to the date of a form application. This document is a stronger indication of the lender’s willingness to lend to this customer because they have invested more time and effort to make the statement.
Critical first step
The key benefits of pre-qualification:
- The buyer knows in advance what they can afford.
- The buyer saves time not looking in the wrong price range.
- The buyer gets the lender’s perspective of the local marketplace.
- The buyer’s future agent will see the pre-approval as a positive sign buyers are serious.
- A source of financing can influence the seller’s reaction to an offer and it can lead to a more efficient and faster closing.
- The buyer learns about the financial alternatives available and has time to consider them.
Lenders have different criteria in determining buying power so that pre-qualifying will go a long way toward a positive experience. The different criteria is also a reason for all borrowers to shop for loans.
The lender needs to know
Once pre-approved and having found the right home, the buyer will still have to fill out an application and refresh the information initially submitted. Depending on the granting date of the pre-approval, underwriting will most likely request additional data. Remember the pre-approval letter is not a guarantee of funding. Only the firm loan commitment offers the best assurances.
Your financing source
There are many aspects to buyers consider before picking a lending source. They do an internet search for reviews on the lenders. When choosing a source they consider how competitive the rates are; the types of mortgages they offer, specifics on each loan, the cost to borrow and how the servicing works on your loan. Seemingly tiny differences can have a big effect on the cost or convenience of a loan product. Here is a starter list of questions buyers ask.
- What different types of mortgages do you offer?
- Do you sell the mortgage after you have originated it? If so, who services the loan going forward?
- Do you provide a written estimate of the monthly payments and a breakdown of the closing costs?
What to expect
The lending process can be confusing because loan officers will spend time and energy trying to convince the buyer they are the best mortgage source. But when their underwriters spend even more time asking follow-up questions and challenging the buyers application, it can be confusing. Conflicting signals are due to the complementary roles the loan origination (sales), and underwriting (risk control) functions play within the organization. Just being aware of the conflicting position may help in cutting down on the frustration it can cause.
Some quick tips
Mortgage lending is an extremely competitive field, and it will pay dividends to shop for a loan. Buyers want lenders to compete for your business. In addition to banks and credit unions, mortgage brokers have many loan products and specialize in mortgage loans only. They are strictly commission based and work more like real estate agents.
Online mortgages are available and underwritten by some of the largest financial institutions in the country. VA mortgages are available for many veterans with no-down-payment required. There are many sources and types of loans that will reveal themselves when you utilize the tools available to seek them out.
A common error in lending happens after approval of the buyer’s loan. They buy a car before the closing! The lender rejects the closing because their circumstances have changed. This circumstance and others have killed many closings. Don’t let it happen to you.