Getting pre-approved over being pre-qualified, what does it all mean.
I have been doing mortgages for 18 + years and I have a very strong opinion on the difference between pre-qualification letters and pre-approval letters.
What do we keep hearing on the streets? Pre-qualification letters aren't worth the paper they are written on. So, pre-approvals are written on gold bars then? The comments below is the reason why I wanted to give more insight to this argument.
Comments from realtors in past discussions :
"A pre qualification is of absolutely no use in my market. If it is not a pre-approval letter...you have NOTHING!"
"The loads of 'preapproval' letters flying around that aren't worth didley really irk me. A good loan officer doesn't run around flying around pre-approvals unless they've done the work."
Is there any real true definition that the mortgage bankers association or National Association of Realtors adheres to? No, not really. It's all based on different definitions by different professionals. So I wanted to break it down using my knowledge and common sense. Keeping in mind that I have discussed this topic with a dozen or so mortgage loan originators who are very knowledgeable, who understand this business, and a few who have underwriting experience. For the most part, they agree with my stance.
A loan officer will usually just ask a borrower the basic information. Such as :
- Social Security number to verify/check credit and credit scores
- Job related questions and income earned for the year
- Assets, trying to figure out how much they have to spend and how much they would have in reserves
The loan officer would then compute the qualifying ratios and if everything else looked good, would then give out a pre-qualification letter. When I do a pre-qualification, I go into more specific questions. ~ Jeff Belonger's mortgage questions ~ I go one step further and talk about your goals and budget. ~ Knowing how much of a mortgage you can afford ~
The pre-approval will go a step further. The items mentioned above would be collected by the loan officer and reviewed. The loan officer would then compute such figures and run the loan through DU or LP or DO. (delegated underwriter/loan prospector/desktop originator) These are names of automated underwriting systems used by lenders. And if the system says approved, a pre-approval letter is issued.
Let's say the loan officer doesn't properly know how to compute income. A borrower gets paid twice a month and not every 2 weeks, which could change the qualifying ratios. Or if the borrower just changed jobs 10 months ago and gets overtime with the new job. It can't be used properly when computing income ratios. What about a large deposit that was just dumped into the savings account, yet the loan officer didn't catch this and it can't be verified.
In my opinion, a real bonafide pre-approval is one that is underwritten by a qualified underwritten or reviewed my a manager in some cases. Anyone can input data into the system and hit the button to get an approval. But if the wrong information is entered, then what? A denial?
Food for thought - I get about 2 e-mails a month from buyers that were pre-approved, after giving their pay stubs, bank statements, and W-2's to the loan officer. Two months later, these same people are denied the day prior or the day of settlement. It happens people and you just need to be careful, no matter what letter you receive. Anyone can fling around the terms, "no problem", "I guarantee", etc. Get to know certain red flags : Mortgage & Real Estate Red Flags
A pre-approval letter not only is different than a pre-qualification letter, but could have different meanings from different loan officers. There are some loan officers that say they can't underwrite a loan unless you have an agreement of sale. Some who are brokers say they can't do pre-approvals because the lender buying the loan from them won't underwrite it unless it's a full package with an appraisal. But these same loan officers give out pre-approval letters, because they reviewed the information themselves. Key reminder : Lenders have their own lender-overlays and definitions.
In my opinion, stop listening to which piece of paper is valid and learn the details. Education on this topic in my opinion is very critical. And if you want to get technical, a commitment letter would be the best letter out there, because with most companies, this is issued by the underwriter. Another term would be conditional commitment letter.
**** This article is of my own opinion and how I view the differences mentioned above****
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