I don't normally send these guys out to deliver notice of loan approvals, but that is what we are going to talk about today-the different stages of approval.
In previous posts I have discussed the importance of visiting your lender prior to beginning your house hunt to ensure that you are looking in the right price range as well as able to actually become approved for a loan. (And I am not speaking to first time home buyers only-if you are a trade-up buyer, this is important to you too.) This makes good sense as you won't be wasting your time looking at homes you can't buy. However, there are different types of approvals-3 in fact- and I want to go through the specifics of each one.
The least invasive is the pre-qualification. In this situation a borrower sits down with a lender and tells the lender how much income they make, what the debts are, and what they think the credit score is. Based on the information that is relayed to the lender, information can be extrapolated on what can be purchased and what type of loan would be used. This type of approval is in a word, worthless. Even the most sophisticated borrower doesn't know all the rules regarding credit, income, loan programs and how debt ratios are regarded. It doesn't mean that what they tell the lender is necessarily wrong, but even if one of those items is inaccurate or a salient point is overlooked, the approval may be meaningless. I once had a borrower that came to me convinced that she qualified for a loan that was income sensitive. There was a cap on how much she could make and still qualify for the loan. She was sure she fit under the cap. Which if her past two years income was all that was taken into account she would have. However, in the case of this particular loan, the previous year's income as well as current year to date income was averaged together. When that happened her income exceeded the limit. Generally speaking I will not issue a pre-approval letter based upon this type of a conversation. Which leads me to the next stage of approval:
The pre-approval. In this scenario credit is checked and I normally ask for at least one pay stub with year to date income. Depending on the situation I may ask for W2's or tax returns as well. I also ask questions about job time, down payment funds, as well as rental or current mortgage information. This way for the most part I am able to compute actual income, see actual debts and credit scores and know work history and how a borrower is paid. As I have mentioned before-consumer credit reports pulled by the buyer do not necessarily mirror or reflect the credit scores that may be pulled by a mortgage credit report,so for pre-approval purposes a mortgage report must be viewed. I will issue a pre-approval letter that is generic in nature-the borrower is pre-approved subject to: (and her lies the rub) all underwriting conditions, acceptable appraisal, clear title work, and final authorization by the investor. So my pre-approval does contain escape clauses. The reason for that is I haven't seen the documentation that the underwriter is going to see. A pre-approval with little documentation still isn't iron clad by any stretch of the imagination.
So what's next, Batman?
Most lenders do not offer this-as it happens- we do. And I fully recommend this approach to home buying. What I am talking about is filling out a loan application and submitting the application and all the documentation that is collected for loan approval and submitting it to the lender for underwriting. Once approved all that is left to collect is the appraisal and the title work once a home is found and put under contract. This is a powerful position to be in for the buyer-particularly at the height of the buying season when there are hot spots in particular neighborhoods and price ranges. Being fully credit approved means there is no guess work about whether or not someone will be approved for the loan. They are already approved. Approving the property is the only remaining item on the agenda. This relieves a mountain of stress in an already stressful situation. Do yourself a favor if you are buying a home this year and turn your offer in to this:
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