How Solid Is Your Pre-Approval For Home Purchase Mortgage

Gustan Cho Associates are mortgage brokers licensed in 48 states

This article is about  How Solid Is Your Pre-Approval For Home Purchase Mortgage

A mortgage pre-approval letter means that a loan applicant has submitted an initial mortgage loan application, called 1003, and the loan originator has run credit and fully qualified borrowers:

The pre-approval letter is issued after the loan originator has reviewed the following:

  • mortgage application
  • borrower’s credit report
  • reviewed credit scores
  • qualified income, debts, and assets of the borrower
  • has checked whether or not the mortgage loan applicant has had a prior bankruptcy and/or foreclosure and has met the necessary waiting period
  • Once loan originator feels confident borrower has met all necessary mandatory lending requirements and guidelines as well as the lender’s own overlays, the loan originator will issue a pre-approval letter

Are All Mortgage Lenders The Same And How Solid Is Your Pre-Approval

Pre-approved borrowers can 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 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 loan originators issue pre-approval letters like they are signing autographs. Many issue them within minutes without actually qualifying the applicant.

  • This practice is a disaster waiting to happen
  • The pre-approval letter and the pre-approval stage is the most important stage in the home buying and mortgage process
  • Borrowers applying for a mortgage and if the loan originator issues a pre-approval letter in 30 minutes or less without interviewing thoroughly and asking for initial documents the chances are they were not properly qualified

The pre-approval letter should be issued after the file has been processed and should be issued by a mortgage underwriter.

The Importance Of Fully Qualifying A Borrower Prior To Issuing A Pre-Approval

What is the importance of fully qualifying the borrower before issuing the initial consent

Only pre-qualifications should be issued after the loan originator is 100% confident the loan will get full approval after reviewing the following:

  • reviewed mortgage loan application
  • bank statements
  • tax returns
  • credit scores
  • credit report
  • gotten a written verification of employment
  • fully calculated income including tax returns for the past 2 years
  • reviewed W-2s for two years
  • reviewed most recent paycheck stubs

Borrowers can shop with a pre-qualification letter but should not enter into a real estate purchase contract without a TBD PROPERTY UNDERWRITE PRE-APPROVAL.

How To Know How Solid Is Your Pre-Approval

Borrowers will know how solid is the pre-approval if the mortgage loan originator who will ask these types of questions:

  •  Are you a 1099 wage earner, self-employed, or W-2 wage earner? 
  • If self-employed, loan originator should ask for two years tax returns
  • If W-2 wage earner, the loan originator should ask for two years tax returns, two years W-2s, and most recent paycheck stubs
  • 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 gift funds?
  • FHA allows 100% of the down payment to be gifted
  • Conventional loans do allow part of the down payment to be gifted

Have you filed bankruptcy or had a foreclosure or short sale?

Waiting Period Guidelines After Bankruptcy And Foreclosure

What is the waiting period after the bankruptcy and housing incident

There is a two year waiting period after bankruptcy discharged date per HUD 4000.1 FHA Handbook Guidelines:

  • 4-year waiting period to qualify for a conventional loan
  • There is a three year waiting period after a short sale to qualify for an FHA Loan
  • Four-year waiting period to qualify for a conventional loan

The waiting period starts from the date of the short sale which is reflected in the HUD Settlement Statement.

Waiting Period After Bankruptcy And Housing Event

Waiting period after foreclosure and deed in lieu of foreclosure: 

  • This is where mortgage denials can happen if the loan officer 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 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 many borrowers who are going through the mortgage approval process and get a last-minute loan denial. This is because the loan officer did not due his or her due diligence on the recorded date of the foreclosure and/or deed in lieu of foreclosure. The homebuyer 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.  After important items have not been reviewed thoroughly by the loan originator, then borrowers will get issued a solid pre-approval letter.