This guide covers the importance of mortgage qualification and pre-approval. A pre-approval is when a home buyer or homeowner has completed a 1003 mortgage loan application and the loan officer is confident the borrower qualifies for a mortgage. A pre-approval should be issued once the loan originator has run credit, ran the file through the automated underwriting system and got an automated approval per DU FINDINGS or LP FINDINGS and is confident the borrower is qualified.
Mortgage qualification is the most important step in the mortgage process. If the loan originator does not qualify the mortgage loan applicant the right way initially, the potential of mortgage denial is imminent.
This is the main reason for mortgage denials on the 11th hour. The mortgage qualification stage is the most important stage of the qualification and application process. Poor mortgage qualification can mean a last-minute mortgage loan denial. In the following paragraphs, we will cover the importance of mortgage qualification and pre-approval.
How Do Lenders Do Mortgage Qualification
Every mortgage company has different systems on doing mortgage qualification. Once you submit your signed mortgage loan application and your documents such as your tax returns, W-2s, bank statements, and other required documents, it normally gets reviewed by the mortgage loan originator. It then gets submitted to processing.
A mortgage processor will then package the whole mortgage package up and submit it to underwriting for a conditional mortgage approval.
Some mortgage companies do not really go over each mortgage loan document as they should. Others, will go over every document with a fine-tooth comb and make sure that everything is in order and no hiccups will be encountered by the mortgage underwriter. For example, mortgage lenders will require two months of bank statements. Many mortgage processors will just submit the two months bank statements the mortgage loan borrower submits to them. This can create a huge problem if there have been overdrafts in the past 60 days.
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Understanding The Importance of Mortgage Qualification and Pre-Approval
Mortgage qualification and pre-approval are crucial steps in the home-buying process for several reasons: Mortgage qualification helps you determine how much house you can afford. Lenders look at your income, credit payment history, debts, and credit score to determine if you’re eligible for a mortgage loan. This helps you set a realistic budget for your home search, saving you time looking at properties that are beyond your means. In a competitive real estate market, having a pre-approval letter gives homebuyers an advantage over other buyers. Home sellers are more likely to consider offers from buyers who have already been qualified and pre-approved for a mortgage because it shows a serious homebuyer.
Narrowing Down Your Options
Pre-approval allows you to narrow down your search to homes that are within your budget. This saves time and effort by focusing on properties that you can realistically purchase. Imagine you find your dream home only to discover later that you can’t secure the necessary financing. Pre-approval reduces the risk of such disappointment, as it confirms that a lender is willing to provide you with a loan for a specific amount.
When you have mortgage pre-approval, you can negotiate with confidence. Home sellers may be more willing to negotiate on the purchase price or terms when they know you have financing in place.
Since much of the paperwork and financial checks have already been completed during pre-approval, the mortgage process tends to move faster. This can be beneficial if you want to close on a property quickly. Some lenders allow you to lock in an interest rate during the pre-approval process. This can protect you from surging mortgage interest rates while you shop for a home.
Avoiding Surprises
Mortgage qualification and pre-approval help uncover any potential issues with your credit or finances early on. If there are problems, you can work on improving your financial situation or addressing any issues before making an offer on a home. In summary, mortgage qualification and pre-approval are essential steps in the home-buying process that help you determine your budget, gain a competitive edge, and avoid potential setbacks in your home purchase. They provide confidence to both you and sellers, making the entire process smoother and more efficient.
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How Bank Overdrafts Can Cause Mortgage Loan Denial
Bank overdrafts are seriously taken by the underwriter and will be a cause of a mortgage loan denial. By catching a bank or bank overdrafts, the mortgage processor can omit that particular bank statement.
Mortgage underwriters can see if the applicant has other bank statements with no overdrafts he or she can use. If not, then we need to let the bank account season for 60 days.
For mortgage loan applicants with overdrafts, a bank print out that is signed, dated, and stamped by the bank teller needs to be used in lieu of actually bank statements. The reason for this is if you use actual 60 days bank statements, the year to date overdraft fees will be posted on the bank statements. This raises a red flag that there were overdrafts whereas if you get 60 bank print outs, the year to date overdraft fees will not show up.
Importance Of Mortgage Qualification With Qualified Income
Qualifying for income in the mortgage qualification process is very important: A mortgage loan originator who has not scrutinized the loan applicant’s income carefully can jeopardize the mortgage approval.
There are many times where a mortgage processor will submit a file to the underwriter with just the recent paycheck stubs and two years W-2s and wait to submit the two years tax returns.
This is because the loan applicant did not provide it to them. The mortgage underwriter can issue a conditional approval and one of the conditions may be to provide two years tax returns. When the two years tax returns are submitted, there can be a lot of unreimbursed expenses. The write-offs on the tax returns will greatly reduce the borrower’s adjusted gross income and cause in a mortgage loan denial.
Conditional Approval With Little Conditions
Most home buyers and mortgage loan originators want a fast quick conditional approval, also known as a loan commitment. A loan commitment is worthless if the conditions on the loan commitment cannot be satisfied or the mortgage loan originator has not properly qualified the borrower. The haste on not properly qualifying the mortgage loan application is the sole biggest mortgage loan denial .
Another reason for a mortgage loan denial where the loan application was not properly qualified is when a borrower is an hourly wage earner with overtime income.
Whenever a mortgage loan applicant has overtime, bonus, or part-time income, verification of employment should be ordered by the mortgage processor before submitting the file to underwriting. Many times this is not done until after the conditional approval and there is a big discrepancy on the borrower’s overtime, part-time, or bonus income. There are times where the employer states that the overtime, part-time, or bonus income is not likely to continue and this will eliminate the overtime, part-time, or bonus income from being used to qualify the borrower’s income for the debt to income ratios. Speak With expert for Mortgage Loans
