A preapproval is the next step after becoming prequalifed. Essentially, this means that you are supplying all of the documentation that is required to support your loan scenario. Everything you have told the Loan Originator needs to be backed up for a “full doc” loan. The mortgage originator will review your supporting documentation (W2s, paystubs, asset accounts, credit report—tax returns if you’re self employed or paid commission…etc.) and make sure that they have a strong file for the underwriter. Once you have selected your mortgage program, your information is typically submitted to an AUS (automated underwriting system aka a computer) which produces “findings”. The findings detail what type of documentation is required for the loan approval. Sometimes the findings will require less or more documentation than a mortgage originator has obtained. Different lenders may have their own underwriting overlays in addition to what the AUS has provided.
There is quite a big difference between being “preapproved” and being “prequalifed”. Both are important steps in the process. How do you know if you’re truly preapproved?
- Have your provided your LO copies of your paystubs, W2s, bank accounts, documentation showing where your down payment and closings costs are coming from?
- Has your LO ran your credit report? Did they provide you with a copy and review your credit report with you?
- Ask your LO what “the findings” are from the AUS/underwriting?
- Has an underwriter reviewed reviewed your file and are there any outstanding conditions?
- Does your preapproval letter address all the items listed above?
- Does your preapproval letter state that you are preapproved or prequalified?
If you’ve answered no to any of these questions, you may not be truly preapproved. Once a borrower is preapproved, the LO will prepare a Preapproval Letter that the Selling Agent or Buyer may use when presenting an offer to the Seller of the property. A prepproval letter is typically on the mortgage company’s letterhead or it may be in a certificate format. When a preapproval letter is issued it should contain the following:
- Date (typically preapproval letters are valid for 90 days).
- The borrower’s names (who is approved for financing).
- The sales price and loan amount(s) they are approved for.
- The type of financing is confirmed (ex. Conventional, FHA, VA, etc.)
- Credit has been reviewed.
- Employment and income has been confirmed.
- Down payment and closing cost have been verified.
- Any closing costs that are being requested to be paid for from the seller.
- Any item the preapproval is subject to (such as satisfactory appraisal, title, complete purchase and sale agreement, etc.)
Preapproval letters are really only as good as the Loan Originator who is providing them. If a mortgage originator has not done the elbow grease required to truly have a preapproved borrower, then the preapproval letter is only worth the paper it’s written on. A strong preapproval letter can be the difference between having your offer accepted on your next home when competing with other buyers.
If you’re considering buying a home located in Washington state, I’m happy to help. Click here to apply and start the mortgage preapproval process.