Pre Qualification Versus Pre Approval
What Is The Difference Between Pre Qualification Versus Pre Approval:
Pre Qualification Versus Pre Approval? These two terms may seem similar but they are very different and all home buyers should realize the difference between the two terms and how the mortgage 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 mortgage lenders go through the same way of pre-approving a mortgage loan applicant. Some mortgage lenders just issue pre-approval letters just by interviewing the mortgage loan applicant 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 mortgage loan originator 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 mortgage loan originator. Over half of my mortgage loan borrowers 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 mortgage loan originator cannot qualify for a home loan. Pre Qualification Versus Pre Approval is very different and 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 I get a phone call by a home buyer who needs to get a mortgage loan, I normally take a few minutes to pre qualify them by asking them a series of questions. 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 over time income, part time income, bonus income and 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 the mortgage loan originator 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 and 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 mortgage loan originator needs to explain the mandatory waiting period requirements after bankruptcy and foreclosure and see if they meet the mortgage lending guidelines . Mortgage 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 ball park property taxes and homeowners insurance. 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 mortgage loan officer 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 qualify for 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 mortgage lending guidelines they need to meet with gaps in employment 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 mortgage loan. Same with minimum credit scores required to qualify for FHA Loan. FHA requires that to qualify for a 3.5% down payment home purchase FHA Loan, the borrower needs a minimum of 580 FICO credit scores and timely payment history for the past 12 months. If the home buyer falls short of a 580 FICO credit score and had a few late payments ten months ago, then this borrower is not pre qualified quite yet and may need help getting his credit scores up to a 580 FICO and have those late payments season for at least 12 months.
The Pre-Approval Letter
Every mortgage 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, and a lot of work that is being done to get a last minute denial or 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 specially look out for are un-reimbursed expenses on income tax returns, the recorded date of foreclosures and deed in lieu of foreclosures and not just go off the date that is reported on the credit report, late payments in the past 12 months, credit disputes on non-medical outstanding collection accounts and charge off accounts , and making sure that mortgage loan applicants with under 620 FICO credit scores or those who need to go through manual underwriting have verification of rent .