In the pre-approval process, the lender looks closely at your credit and verifies your income (as opposed to pre-qualification, for which your information is not verified). The lender then gives you a pre-approval letter, which says that your loan will be approved once you make a purchase offer on a home, and once you submit the following documents – the purchase contract, the preliminary title information, the appraisal, and your income and asset documentation. Keep in mind, though, that pre-approval is not an absolute guarantee that your loan will be approved.
Pre-approval means that the lender is confident that you can make the necessary down payment and that your income is sufficient to cover the mortgage payments. At this stage, only one concern remains. The lender needs to make certain that the property’s value offers sufficient collateral in relation to the loan amount. In other words, the home must be appraised for an amount more than, or equal to, the purchase price.
Pre-qualification
Getting pre-qualified is an informal process in which you are interviewed
by a mortgage professional about your income and expenses. This gives
you a general idea of the price range you can afford. It really doesn’t
bring you any closer to securing a mortgage.
Pre-approval
When you are pre-approved for a mortgage, it means that a lender has looked
closely at your credit report, your employment history and your income
and has then determined which loan programs you qualify for, the maximum
amount that you can borrow, and the interest rates you will be offered.
Be aware, however, that your loan representative is not the one who
will ultimately approve your loan. That is the underwriter’s role,
and these days underwriting is automated. In order for your loan representative
to submit your application for pre-approval, you must provide your last
two years’ tax returns and W-2s, your most recent pay stubs, bank
account statements, and a signed authorization to order your credit
report. The automated underwriting system will deliver a pre-approval
letter within minutes, and will list any conditions that need to be
met for full approval.
Mortgage Commitment
A lender will issue a loan commitment after it has approved both you and
the property you intend to purchase. Having examined all of the necessary
documentation to verify your ability and willingness to repay the loan,
your loan representative will submit your complete application to the
underwriter. The underwriter will return one of four decisions: approval,
approved with conditions, suspended (which means they need more documentation
from you before they can make a decision), or denied.
The Process of Getting Pre-approved
Most of the factors that will determine your pre-approval – your
credit report, the down payment, your expense ratios – have been
already been addressed in detail in the first module of this course,
Estimate Your Price Range
. Revisit those topics if you still need to take actions to improve
your chances of getting pre-approved for the loan that you desire.
The process of getting pre-approved is actually quite simple. All you have to do is provide your lender the documentation that they require. Be prepared to supply your loan representative with pay stubs, bank account statements, tax returns and W-2 forms from the previous 2 years, and documents to show other sources of income (which could include a second job, overtime, commissions and bonuses, interest and dividend income, Social Security payments, VA and retirement benefits, alimony, and child support). Beyond that, the ball is in the underwriter’s court.