Several years ago most people didn’t really care about the difference between a pre-qualification and a pre-approval because there were so many qualified buyers in the home buying market place that if you couldn’t buy a home, there was somebody else who could. With lender guidelines tightening and the pool of buyers shrinking, the importance of a pre-approval is increasing quickly. So what is the difference?
When I complete a pre-qualification with my customers, I typically do this over the phone and in about 10 – 15 minutes. Here is what I ask:
- Social security number
- Length of employment
- Balance in bank accounts
- Current rent or mortgage payment
- Comfort range for new payment
- Time frame to purchase or refinance
After asking these questions, I do some calculations and run a credit report. During the call I can normally tell someone whether or not I believe that I can get them qualified for a mortgage. I, and other experienced mortgage lenders, am able to do this due to the knowledge and past experiences I have helping customers obtain mortgage loans.
This is the level of qualification where most customers would stop before they buy a home. The problem with this level of qualification is that nothing has been documented or proven to the lender. Someone could tell the lender that they are employed and make $60,000/yr, but when a pay stub is provided the income may only be $45,000 or even worse, they may not even be employed. The pre-qualification is based entirely on good faith.
Pre-approval takes the pre-qualification step to the documentation phase. All the income, employment and bank information you told the lender about is now documented. Here is a list of the documentation that a lender will need to complete a pre-approval:
- Pay check stubs
- Bank statements
- Federal Tax Returns
- Divorce decree
- Child support/alimony orders
Not everyone will be required to provide these documents, however these are the most common. In some cases, there is even more documentation that will need to be provided to the lender to complete the pre-approval.
Once the documentation is provided, the lender will then input all of the information into a loan application and run an automated underwriting system which compares the borrower’s information to the guidelines for a mortgage to determine if the borrower is an acceptable risk to provide a mortgage loan. There are two possible outcomes: pre-approval or a referral to an underwriter (traditional or manual underwriting).
In the case the computer can not approve the loan a person underwriter is able to review the file to determine if there are any circumstances that the computer could not analyze. The person can take these circumstances into consideration and re-evaluate the risk. In some cases the underwriter can overturn the computer decision, or sometimes they may agree with the computer risk assessment.
Just about every seller wants to know they are selling their house to someone who is actually qualified to buy the home before they take it off the market. Be prepared to provide a pre-approval letter from your lender when submitting offers on homes you are interested in purchasing.
Lending a Hand,