Mortgage Pre-Approval: How Solid Is Your Pre-Approval?
A mortgage pre-approval letter means that a mortgage loan applicant has submitted an initial mortgage loan application, called the 1003, and the mortgage loan originator has run credit and has qualified the mortgage loan applicant. The mortgage pre-approval letter is issued after the mortgage loan originator has reviewed the mortgage application, has reviewed the mortgage loan borrower’s credit report, reviewed the mortgage loan applicant’s credit scores, reviewed the income, debts, and assets of the mortgage loan borrower, and has checked whether or not the mortgage loan applicant has had a prior bankruptcy and/or foreclosure and has met the necessary waiting period to qualify for mortgage loan. Once a mortgage loan originator feels confident that the mortgage loan borrower has met all necessary mandatory mortgage lending requirements and guidelines as well as the mortgage lender’s own mortgage lender overlays, then the mortgage loan originator will issue a mortgage loan pre-approval letter where the mortgage loan applicant can give it to their realtor where they can now go shopping for a home and enter into a real estate purchase contract. However, are all mortgage loan pre-approvals the same? How solid is your pre-approval? Why is it that there are so many cases where mortgage loan pre-approval letters get issued and there are last minute mortgage loan denials? How long does it take for a loan officer to issue a solid pre-approval letter? How do mortgage loan originators issue pre-approval letters? Can pre-approval letters be issued in minutes like many mortgage companies advertise? Why would one mortgage lender issue me a mortgage pre-approval letter and another mortgage lender will not?
The Pre-Approval Stage Is The Most Important Stage
Some mortgage loan originators issue pre-approval letters like they are signing autographs and issue them within minutes without actually qualifying a mortgage loan applicant. This practice is disaster waiting to happen. The pre-approval letter and the pre-approval stage is the most important stage in the home buying and mortgage loan approval process. If you are applying for a mortgage and if you mortgage loan originator issues you a pre-approval letter in 30 minutes or less without interviewing you thoroughly and asking you for initial documents, you need to run away from that loan officer and find another mortgage loan originator. The pre-approval letter should be issued after the mortgage loan originator is 100% confident that your mortgage loan will get a full approval and has not just reviewed your mortgage loan application, credit scores, and credit report but has fully calculated your income including your tax returns for the past 2 years as well as your W-2s for two years and your most recent paycheck stubs.
How You Know How Solid Is Your Pre-Approval
You will know how solid is your pre-approval if you have a mortgage loan originator who will ask you these types of questions:
1. Are you a 1099 wage earner, self employed, or W-2 wage earner? If you are self employed, your mortgage loan originator should ask you for two years tax returns. If you are a W-2 wage earner, your mortgage loan originator should ask you for two years tax returns, two years W-2s, and most recent paycheck stubs.
2. Do you have sufficient funds for the down payment and/or closing costs? If not, do you have a family member and/or relative that can give you the gift funds? FHA allows 100% of the down payment to be gifted and conventional loans do allow part of the down payment to be gifted.
3. Have you filed bankruptcy or had a foreclosure or short sale? There is a two year waiting period after bankruptcy discharged date to qualify for FHA Loan and 4 year waiting period to qualify for a conventional loan. There is a three year waiting period after short sale to qualify for a FHA Loan and four year waiting period to qualify for a conventional loan. The waiting period starts from the date of the short sale which is reflected on the HUD Settlement Statement.
4. Waiting period after foreclosure and deed in lieu of foreclosure: This is where mortgage denials can happen if the mortgage loan originator does not resolve this issue at the pre-approval stage. The waiting period after foreclosure or deed in lieu of foreclosure does not start until the deed of the property has been transferred out of the homeowners name into the name of the lender or the new home buyer. Just because the foreclosure is reported at a certain date on the borrower’s credit report does not matter. Mortgage lending guidelines will go off the actual date of the sheriff’s sale or the actual date the deed of the property has been transferred out of the homeowners name. I get so many mortgage loan borrowers who is going through the mortgage loan approval process and get a last minute mortgage loan denial because the mortgage loan officer did not due his or her due diligence on the recorded date of the foreclosure and/or deed in lieu of foreclosure and the home buyer has not met the mandatory waiting period.
There are more documents that will be required, however, those documents can come later after the pre-approval letter has been issued. If the top four items has been reviewed thoroughly by the mortgage loan originator, then you will have a solid pre-approval letter.