Mortgage Pre-Approval Versus Pre-Qualification By Lenders
Mortgage Pre-Approval Versus Pre-Qualification By Lenders
This BLOG On Mortgage Pre-Approval Versus Pre-Qualification By Lenders Was UPDATED And PUBLISHED On August 12th, 2019
There is a big Difference Between Mortgage Pre-Approval Versus Pre-Qualification:
- A pre-qualification is basically to see whether home buyers are qualified to proceed to the next level, which is a pre-approval
- Most home seller’s realtor’s do not care about a pre-qualification letter
- This because what a pre-qualification is, is an interview between the loan officer and home buyer
- Loan officers ask basic questions, collects docs, runs credit, and runs Automated Underwriting System and issues a pre-qualification letter
In this article, we will cover and discuss the Difference Between Mortgage Pre-Approval Versus Pre-Qualification.
Properly Qualifying Borrowers Prior To Mortgage Pre-Approval
Borrower answers questions, completes the loan application, forwards mortgage docs, and loan officer determines that the borrower is pre-qualified for a mortgage loan.
- Most times loan officers issue pre-approvals without verifying the documents from the mortgage loan applicant
- This is when trouble can start
- Loan officers should never issue pre-approvals
Only mortgage underwriters should issue pre-approval letters after the mortgage file has been fully underwritten and all docs verified.
How Does One Get Pre-Qualified For Mortgage
- Every lender has different lending guidelines
- Just because one lender may qualify them for a certain amount does not mean another lender will qualify them for the same amount
- Many lenders have a certain debt to income ratio caps depending on the borrower’s credit scores
- Most lenders will cap the debt to income ratios to 43% if their credit scores are under 620
- Many lenders, such as myself, can cap the debt to income ratios to 56.9% if the borrower’s credit scores are 620
- Others may not cap to the 56.9% level without credit scores of 640 or higher
- Many lenders will have a cap of debt to income ratios of no higher than 45%
- Some may go up to 50%
One of the first thing to ask a lender is what their maximum debt to income ratio cap is, especially borrowers a lot of debt obligations.
Questions Asked For Pre-Qualification
- W-2 employee or 1099 wage earner?
- What were wages and/or income for the past 2 years?
- How long on the job?
- Any gaps in employment?
Full-time status on the current job?
Can Other Income Be Used As Qualified Income?
Any other income such as the following can be used as qualified income if the borrower has a two-year history of earning such income: The following income can be used as qualified income with 2 years of seasoning:
- part-time income
- overtime income
- bonus income
- child support income
- alimony income
- royalty income
- social security income
- pension income
- other income
- If so, was that income for the past two years?
- Is that income likely to continue for the next 3 years?
Does borrower claim unreimbursed business expenses on tax returns and if so how much?
Credit Score Guidelines
Do borrowers have any idea of what their credit scores are?
- If so what is middle credit score?
- Does borrower have prior foreclosure, bankruptcy, deed in lieu of foreclosure, short sale?
- If so how long has it been?
- Does borrowers any open collections, medical collections, judgments, tax liens, child support payments, alimony payments?
- If so is borrowers timely on them?
- Have borrowers been timely on all of payments for at least the last 6 months, preferably for the past 12 months?
Do borrowers currently rent or live with family or own own home?
Bank Statements Required
If rent, can borrower provide the past 12 months canceled checks and/or bank statements that have been payable to landlord?
- How much does borrower have in the bank account?
- Have borrowers bounced check and/or overdrafts in the past 12 months?
- Do borrowers have enough money for the down payment?
- If not, is borrower planning on getting a gift from a family member and/or relative?
- If so, is the donor of the gift funds willing to provide you 30 days bank statements showing the down payment has been seasoned for at least 30 days and sign a gift letter?
A pre-qualification will turn into a pre-approval once borrowers provide their loan officer all of the MORTGAGE DOCUMENTS NEEDED which confirms mortgage pre-qualification.
- A pre-approval letter provides strength and confirms mortgage underwriter has fully underwritten and signed off on the mortgage file
- Mortgage underwriter has reviewed the following and verified all documents:
- has qualified the mortgage loan borrower, has reviewed the mortgage application, has run credit, reviewed the borrower’s income
- W-2s, 1099’s, and tax returns reviewed
- has an approve eligible per DU FINDING and/or LP FINDINGS
- has offered the borrower its blessing to enter into a real estate contract
Pre-Approval Versus Loan Commitments
The pre-approval is the same as a loan commitment and/or conditional loan approval:
The conditional mortgage loan approval will turn into a CLEAR TO CLOSE once the borrower has met all conditions such as the following:
- other conditions just as homeowner insurance quotes
- updated verification of employment
- updated proof of funds to close
- other conditions requested by the mortgage underwriter
Difference Between Mortgage Pre-Approval Versus Pre-Qualification And Strength Of Pre-Approval
Difference Between Mortgage Pre-Approval Versus Pre-Qualification is pre-approval letter offers strength and the entry to view homes that are listed on the market. All seller’s real estate agents will not accept a real estate purchase offer without a home buyer without a pre-approval letter. Pre-qualification letters will not be accepted by most real estate agents and are pretty much worthless. A pre-approval letter offers the following:
- All pre-approvals at Gustan Cho Associates Mortgage Group has been fully underwritten and signed off by our mortgage underwriters
- All our pre-approvals are loan commitments
- A pre-approval letter offers how much borrowers will qualify for at what interest rate
- The type of mortgage loan programs such as an FHA loan, Conventional Loan, VA loan, USDA loan, or Jumbo Loan will be stated on pre-approvals signed off by our mortgage underwriters
- A pre-approval will give a borrower what the principal, interest, taxes, and insurance will be; total monthly housing payment
- A pre-approval letter will show the home seller and selling real estate agent that the home buyer is a qualified home buyer with a solid loan commitment
Home buyers should start the mortgage process as soon as possible so the mortgage lender can start working on a solid pre-approval.