What Is A Pre-Approval Letter?
By Gustan Cho
A pre-approval letter is a letter from a mortgage lender that the home buyer has been pre-approved for a mortgage loan for a specific dollar amount at a certain interest rate. The pre-approval letter will state whether the home buyer has been pre-approved for a conventional loan or other mortgage loan program such as FHA, VA, USDA, or Jumbo Mortgage. Most home sellers real estate agents will not show a home if the potential home buyer cannot present a pre-approval letter. Some real estate agent want to verify the pre-approval letter and calls the home buyer’s loan officer to confirm the pre-approval letter and to question the loan officer on how the home buyer was pre-approved.
How Do Lenders Pre-Approve Home Buyers?
Every mortgage lender has different ways of pre-approving a home buyer. Almost all mortgage lenders will require for the mortgage loan applicant to complete a 1003 mortgage application. The mortgage application can be completed online or the mortgage loan originator can take the mortgage application over the phone. The mortgage application does not have to be signed. The mortgage loan originator will then ask the mortgage loan applicant questions pertaining income, liability, and assets. Once the mortgage loan originator completes the mortgage application and is done questioning the potential home buyer, he or she will run credit and review both the credit report and the credit scores. If the credit scores and credit report come back clean, a pre-approval can be issued at the discretion of the mortgage loan originator. If the credit report reflect marginal credit and low credit scores, most experienced mortgage loan originators will run DU or LP, which is either Fannie Mae Automated Underwriting System or Freddie Mac Automated Underwriting System to see whether it comes back approve/eligible per DU FINDINGS and/or approve/eligible per LP FINDINGS. If the mortgage loan gets an approve/eligible, then a pre-approval letter will be issued to the mortgage loan applicant.
Initial Documents Required For Pre-Approval
Depending on the mortgage lender, the lender can ask you for documents such as two years tax returns, two years W-2s, 2 months bank statements, most recent paycheck stubs, and other documents required to process the mortgage loan prior to issuing a pre-approval. This task of the mortgage loan originator reviewing your mortgage documents is highly recommended before the issuance of the pre-approval because everything you have stated on your mortgage application can be verified and the pre-approval adds much more strength. However, if you are solid on the answers on the mortgage application and the mortgage loan originator feels that you are providing the right information, the mortgage loan originator can issue the pre-approval letter without seeing the documents. Remember that all the information listed on the mortgage application needs to be valid and verified for the the pre-approval to be valid and for the mortgage loan application to get a final mortgage loan approval. If you are not sure of your income, assets, liabilities, it is best to have your mortgage loan originator to review your mortgage docs before getting a pre-approval letter and having a home under contract.
Pre-Approval Versus Approval
Most mortgage loan originators will not issue a pre-approval letter unless they feel 100% confident that the mortgage loan applicant is qualified for a particular mortgage loan program and reviewed the mortgage loan application and credit profile. For mortgage lenders who have no mortgage lender overlays, if they get an automated approval, they will go off the findings so an automated approval via either Fannie Mae or Freddie Mac Automated Underwriting System is the final approval as long as the mortgage loan borrower can meet all the conditions asked by the automated approval and mortgage loan underwriter.
Credit And Income Key To Solid Pre-Approval
A pre-approval letter is a letter from the mortgage lender which is equivalent to an offer of intent to do the mortgage loan for a certain dollar amount at a certain rate as long as the mortgage loan applicant can provide proof that all of the information stated on the mortgage loan application and the information listed on the credit report as well as providing conditions requested by the mortgage loan underwriter. A pre-approval letter is issued after a mortgage loan originator has completely review the home buyer’s mortgage application and thoroughly reviewed their credit. The pre-approval converts to an approval once all the conditions such as the appraisal, verification of employment, verification of income from the IRS, and other requested conditions have been met and satisfied.
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