Last week I shared how it’s pretty much mandatory that if you are a home buyer making an offer on a home located in the greater Seattle area, you better be equipped with a strong preapproval letter from a reputable lender.
Some home buyers are taking this a step further and requesting a Loan Commitment Letter from their lender. What’s the difference?
There are actually three levels of qualifications that a potential home buyer may have after contacting a lender. Please keep in mind that not all lenders may have the same standards or definitions as what I’m posting here.
Prequalifed means that the borrower has talked with a lender and they have reviewed information. The borrower may have only verbally provided information to the lender to see if the borrower is “qualified” to buy a home at a certain price range or loan amount. The credit report may or may not be obtained at this point. This is a preliminary stage in the home buying process. A prequal letter is very quick to prepare and provide to a borrower.
A lender may issue a “prequal letter” if the borrower has not provided all supporting documentation required to be considered “pre-approved”.
A borrower is preapproved once they have provided all supporting documentation to back up or support what was determined at the pre-qual stage. If a borrower is preapproved, the lender has pulled their credit and addressed any potential issues, has ran the loan through automated underwriting (AUS) and has obtained the items required per the “findings” from the AUS response. The borrower is providing all necessary income and asset documentation to the lender.
Once the lender has the required items, they will prepare a preapproval letter based on the borrowers financial scenario and what they are intending to offer on the home. A preapproval letter is often prepared by the loan officer and does not mean that an underwriter has reviewed the loan application. NOTE: when I have a unique scenario with a borrower, I will have an underwriter review the scenario before I issue a preapproval letter.
A preapproval letter may be issued quickly, depending on how soon the borrower can provide their supporting documentation and how complicated their scenario is.
A “loan commitment letter” means that not only has the applicant preapproved, an underwriter has reviewed the application and the letter will include all conditions to the loan approval. The lender is committing to lend to the borrower per the terms stated in the commitment letter. A loan commitment letter may take a longer to prepare as it requires an underwriter to review the application and supporting documentation.
Often times, when a borrower wants or requires a commitment letter, we will begin with a preapproval letter with the commitment letter following once we receive the underwriters approval.
All three letters, prequal, preapproval and loan commitment letter, are subject to property conditions, such as the title report and the appraisal. They are also subject to market changes, such as interest rates or possible program changes (until the loan or program is locked). Of course the letters are also subject to any changes the borrowers may make from what was used on their application, such as changes to employment, income, assets, debts or credit scores.
I cannot stress enough how important it is for potential home buyers to start the loan approval process early. If you’re considering buying a home located anywhere in the beautiful state of Washington, where I’m licensed, I’m happy to help you!