Pre-Qualification Versus Pre-Approval Issued By Mortgage Lenders
This ARTICLE On Pre-Qualification Versus Pre-Approval Issued By Mortgage Lenders Was PUBLISHED On July 19th, 2019
What Is The Difference Between Pre Qualification Versus Pre Approval:
- Pre Qualification Versus Pre Approval?
- These two terms may seem similar
- They are very different
- All home buyers should realize the difference between the two terms and how lenders they consult with issue pre-approval letters
- The Pre Approval Process is hands down the most important process in the mortgage application process
- A sloppy pre-approval means a potential loan denial
- Not all lenders go through the same way of pre-approving a mortgage loan applicant
In this article, we will cover and discuss the difference between a Pre-Qualification Versus Pre-Approval Issued By Mortgage Lenders.
How Lenders Issue Pre-Approval Letters
Some lenders just issue pre-approval letters just by interviewing the mortgage loan applicant:
- This holds true without even taking a formal mortgage loan application, running credit, or even looking over income documents and tax returns
- If you get issued a pre-approval letter by a loan officer without them taking your mortgage loan application and running credit as well as not requesting your tax returns, W-2s, and 30 days paycheck stubs and are told to go and make a real estate purchase offer and sign the real estate contract, stay away from that loan originator
- Over 75% of our borrowers at Gustan Cho Associates are folks who already had pre-approval letters and have a signed real estate purchase contract but due to the sloppy pre-approval letter issued by their loan originator could not qualify for a home loan
Pre Qualification Versus Pre Approval is very different. Most pre qualification letters are not being honored anymore from real estate agents and home sellers.
Main Difference Between Pre Qualification And Pre Approval
Whenever we get a phone call by a home buyer who needs to get a mortgage loan, our loan officers normally take a few minutes to pre-qualify them by asking them a series of questions. The pre-Qualification process is normally a phone interview and these are normally the questions asked:
- Are you a W-2 wage earner or self-employed?
- If W-2 Wage Earner, are you hourly or salaried?
- Do you have overtime income, part-time income, bonus income
- If so, have you had a history of other income for the past two years?
- If self-employed, have you been self-employed for the past two years?
- Self-employed borrowers need to provide two years of both business and personal tax returns before the mortgage loan application process can proceed
- How is your credit and do you know what your credit scores are?
- Have you had any late payments in the past 12 months
- If so what were they and how long ago were they?
- Have you filed bankruptcy, had a foreclosure, had a deed in lieu of foreclosure, or short sale in the past and if so when was it?
- If any of these answers are yes, then the loan officer needs to explain the mandatory waiting period requirements after bankruptcy and foreclosure and see if they meet the mortgage lending guidelines
- Loan originators should ask you about whether or not you have any government loans such as student loans and child support and make sure that you are current with them
The amount of house you want to purchase and the area, as well as ballpark property taxes and homeowners insurance, should be discussed. This is important in calculating debt to income ratios.
Pre-Qualification Versus Pre-Approval: Pre Approval Is Next Step
The main difference between a pre-qualification versus pre-approval is that the pre-qualification is mainly a preliminary interview process between the home buyer and the loan officer:
- The loan officer needs to see where the home buyer stands in qualifying for a home loan and how much home the home buyers can afford
- The pre-qualification phase is when the home buyer meets the minimum mortgage lending guidelines with regards to credit and income
- There are certain rules and regulations on many matters to qualifying for a home loan
- For example, if the borrower had been unemployed for quite some time and just started a new full-time job, then one of the lending guidelines they need to meet with gaps in employment
- The key question is if the borrower has been unemployed for six or more months, they need to have six months job seasoning requirement in their new full-time job in order to qualify for a mortgage loan
- Same with minimum credit scores required to qualify for FHA Loan
- HUD requires that to qualify for a 3.5% down payment home purchase FHA Loan, the borrower needs a minimum of 580 credit scores and timely payment history for the past 12 months
- If the home buyer falls short of a 580 credit score and had a few late payments ten months ago, then this borrower is not pre-qualified quite yet
Borrowers may need help getting his credit scores up to a 580 FICO and have those late payments season for at least 12 months.
Importance Of The Pre-Approval Letter
Every loan originator has different steps they take prior to issuing a pre-approval letter.
- I always preach to my loan officers and staff that the pre-approval phase of the mortgage loan application and mortgage loan approval process is the most important
- A lax or sloppy pre-approval on any mortgage loan borrower may affect many lives
- Not just the lives of the home buyers but also the home sellers, real estate attorneys, real estate agents from both sides
- A lot of work that is being done to get a last-minute denial of the mortgage loan process gets halted in the middle because the loan officer did not properly qualify the mortgage loan applicant
- Things that loan officers need to look out for especially are un-reimbursed expenses on income tax returns
- Other important factors to keep an eye out for is the recorded date of foreclosures and deed in lieu of foreclosures
- Housing events cannot just go off the date that is reported on the credit report
- Late payments in the past 12 months is another issue frowned upon the automated underwriting system and mortgage underwriters
- Other deal killers can be credit disputes on non-medical outstanding collection accounts and charge off accounts
Loan officers should make sure that mortgage loan applicants with under 620 credit scores or those who need to go through manual underwriting have verification of rent and/or can complete a living-with-family-rent-free letter.