Pre-Approval Versus Loan Commitment
This BLOG On Pre-Approval Versus Loan Commitment Was Written By Gustan Cho NMLS 873293
Many first time home buyers often ask What Is The Difference Between Pre-Approval Versus Loan Commitment. Home buyers needing to start house shopping would need a pre-approval letter from a reputable mortgage lender. The pre-approval stage of the mortgage process is the most important step and the number one reason why last minute mortgage loan denials or stress during loan process happens is due to borrowers not being properly qualified. A less than diligent loan officer issuing a sloppy pre-approval letter is disaster waiting to happen. There are some sellers who are taking the pre-approval process a step further and asking for a loan commitment versus pre-approval. What Is The Difference Between Pre-Approval Versus Loan Commitment?
Level Of Qualification Mortgage Process
Every lender will have their own system of qualifying borrowers. However, in general, there are three levels of borrower qualifications.
- Loans Commitment
The initial contact with a loan officer is when most borrowers get pre-qualified for a mortgage. What pre-qualified means is that the borrower has talked and interviewed with a loan officer and the loan officer has determined that the borrower can go further into the pre-approval phase of the mortgage process. On many instances, loan officers do not ask for documents and just go off the information given to them by borrowers. Most of the time, borrowers will complete an online secured mortgage application and loan officers will run credit. Loan officer may have the copy of the application, also called the 1003, as well as the copy of the borrower’s credit report. A pre-qualification letter is normally issued after the brief interview by the loan officer.
Most of documents required to process mortgage is not provided to loan officers during the pre-qualification stage of mortgage process. The next step is the mortgage pre-approval process where loan officers ask for Document Required To Process Mortgage . Some of documents required to process and issue a pre-approval letter are the following:
- Two years W-2s and tax returns
- Sixty days bank statements
- 30 days of paycheck stubs
- Asset information
- Divorce and/or child support docs
Borrowers will be considered to have been pre-approved once they provided all supporting mortgage documents required. Pre-approval letters are only issued after the loan officer has reviewed borrower’s credit report and ran automated findings from Automated Underwriting System. Borrowers who have unique case scenarios with credit and/or income, loan officers should present it to the mortgage company’s underwriting department and get clarification prior to issuing a pre-approval letter. There are minimum mortgage guidelines that loan officers need to be aware of but more importantly, the loan officer needs to know their lender overlays.
A pre-approval letter is issued by a mortgage loan originator and the file has not been to a mortgage processor or underwriter. Loan officers who have special situations where they are not sure about should present the case scenario to either the mortgage company’s help desk or an underwriter prior to issuance of a pre-approval letter. The difference between pre-approval versus loan commitment is that an underwriter has already signed off with a loan commitment whereas not so with a pre-approval.
What Is A Loan Commitment?
A mortgage loan commitment means that the borrower’s loan package has been assigned to a mortgage underwriter and reviewed thoroughly. Some mortgage companies will require a home appraisal prior to the issuance of a loan commitment letter. A list of conditions will be stated on the loan commitment letter. What this means is that the underwriter will sign off on the loan commitment and issue a clear to close as long as the borrower can provide the list of conditions. Examples of conditions are the following:
- Letters of explanations
- Updated paycheck stubs and bank statements
- Missing items from loan documents provided
- Final Verification of Employment
- Requesting loan officer to lock the mortgage rate
Most lenders have overlays on government and/or conventional loan programs they offer. Borrowers with credit issues and higher debt to income ratios may encounter problems if they decide to choose a lender who has many overlays. What are lender overlays? Overlays are mortgage guidelines that is above and beyond those set by FHA, VA, USDA, FANNIE MAE, AND FREDDIE MAC. We will cover some examples of overlays:
- Minimum credit score requirements to qualify for 3.5% down payment FHA Loans is 580 FICO.
- Many lenders require a 620 FICO or higher. This lender has overlays on credit scores where they require a higher credit score than HUD’s 580 FICO minimum requirements.
- FHA does not require borrowers to pay off outstanding charge off and collection accounts. However, most lenders will require all collections and charge offs to be paid in full prior to closing. This lender has overlays on collection accounts.
- Maximum FHA DTI Requirements for an approve/eligible per Automated Underwriting System is 46.9% DTI Front End and 56.9% DTI Back End. However, many lenders will cap debt to income ratios to 45% to 50% DTI. This is called overlays on DTI.
FHA Loan During And After Chapter 13 Bankruptcy
One of the most common overlays instituted by lenders is requiring a one year or two year waiting period after Chapter 13 Bankruptcy discharged date.
- Borrowers can qualify for FHA Mortgage one year in a Chapter 13 Bankruptcy Payment Plan with the approval of the Bankruptcy Trustee which I have never ever heard of a Trustee not approving a home purchase.
- 12 months of timely payment is required to all creditors with no late payments.
- Per HUD Guidelines, there is no waiting period after Chapter 13 Bankruptcy discharged date to qualify for a 3.5% down payment FHA home purchase loan. However, most lenders and banks will require a one to two year waiting period after Chapter 13 Bankruptcy discharged date as part of their overlays.
If you are shopping for a lender who has no overlays, contact The Gustan Cho Team at Nationwide Mortgage & Realty LLC NMLS 276777. We specialize in government and conventional loans with no overlays. We are available 7 days a week, evenings, weekends, and holidays. Contact us at 262-878-1965 or text Gustan Cho on his cell at 262-716-8151 for faster response. You can email us with any mortgage inquiry at email@example.com.