In this day and age a pre-approval letter is nearly as important as the purchase contract itself. Sellers and real estate agents use a pre-approval letter to sift through competing offers. Although not required, a pre-approval letter gives the seller confidence that you can obtain the necessary financing to close on their home. For buyers, it makes your offer a stronger one. That’s the power of a pre-approval letter!
The Pre-Approval Process
Getting pre-approved means having your credit and financials verified to make sure that they meet the underwriting guidelines. Your assets, income, employment history and credit history are most crucial. Most home loans that are declined will fall under one of these categories. A loan officer will collect the necessary documents to confirm your scenario and then have them reviewed by an underwriter or underwriting system. A pre-approval letter is typically conditioned upon the property. A loan officer won’t know how the property will appraise, nor will they know if the chain of title is clean. It is important to realize that a pre-approval letter is not a guarantee to lend. It’s one of the first steps in the lending process. The final lending decision is left with the underwriter once all of the borrower’s documents and property information have been collected and reviewed.
The Difference Between a Pre-Approval and a Pre-Qualification
There is also the option of getting ‘pre qualified’. This means that an application is taken and a credit report is run. But the file does not get underwritten. Hopefully the loan officer will also request a copy of the borrower’s documents, but often times this is not the case. Most “pre-qualifications” are done over the phone and are a quick analysis to determine if you are able to take the next step in the pre-approval process.
Most real estate agents have concerns over those who have not gone through the full process of pre-approval. It’s another layer of risk for their seller. If the borrower states their income to be one thing and it turns out to be another then there is a problem. For instance, a borrower says they earn $10,000/month but $1,000 of that comes from commission income that they recently started to receive. That’s a problem because underwriting guidelines require a 2 year history of commission income in order to use it towards qualifying. This would raise the borrower’s debt to income ratios and potentially disqualify them from the loan. Not only does this hurt the seller but the buyer could lose their earnest money deposit and the money that they paid for an appraisal and inspections!
You have to be careful no matter how you’re planning to fund a home purchase. A plan is crucial…whether that plans is defensive, to protect yourself, or offensive, to determine the best strategy, or both. The best bet for anyone looking for home financing is to talk to a loan officer. Although improving, the economy is still struggling. No one in their right minds wants to make flippant decisions when so much money is at stake.