Are you really preapproved or just prequalified for a mortgage? Part 2

preapprovalA 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.

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Are you really preapproved or just prequalified for a mortgage? Part 1

I Spy FisheyeThere’s quite a difference between being prequalifed for a mortgage and preapproved.   The letters that Loan Originators provide when requested for a prequal or preapproval may appear very similar.  In fact, I’ve talked to borrowers on the phone who thought they were actually preapproved, when all they really had was a rate quote worksheet or possible a good faith estimate from a lender.  A good faith estimate, loan estiamte or rate quote worksheet are not a commitment to lend and do not indicate that someone has been prequalified.

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What Do You Need for a Preapproval?

preapprovalIf you’re considering buying a home, many real estate agents and/or sellers will require a preapproval letter. A preapproval letter is different than being “prequalified”. Being prequalifed means that you have provided verbal information to a mortgage originator to get an idea of what you qualify for. Being preapproved means that you are providing documentation that supports the information you have provided. Income, employment, assets and credit are verified for a preapproval.

Some preapproval letters aren’t worth the paper they’re written on. Especially if the mortgage originator you’re working with does not require supporting documentation before preparing the letter. If you have not provided supporting documentation (listed below) to your mortgage originator – you’re probably just prequalified and not actually preapproved.

Here is a list of documents you may be required to provide in order to obtain a preapproval:

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The Mortgage Process: Contemplating Buying a Home to Getting Preapproved

For a while now, I’ve had this idea floating around in my head that with four years of articles at Mortgage Porter, I really should organize the post by the actual mortgage process.  Right now, my blog is traditionally organized chronologically and by categories.  I’m not changing that at all…what I am planning on doing is reposting the articles I most commonly refer to for my clients in an order that follows the mortgage process.  This will be a post I will continue to update with new content via links to the article…it’s a work in progress!  

In my opinion, someone considering buying a home should start researching the process months before actually entering into a purchase and sales agreement.  So that’s where we’ll start:

Considering Buying a Home?

Getting on Track to Buy Your Home

Basic Tips for Homebuyers

How Much Home Can I Afford?

That new car with cost you!

Tips for Improving Your Credit Score

Game Plan for if your credit score is low.

Getting Preapproved

Are You Really Preapproved or just Prequalified?

Debt to Income Ratios (aka DTI)

Do I Really Have to Provide All Pages of My Bank Statements?

What is required to document income?

Documentation for Self Employed or Commissioned Paid Borrowers

Why it pays to get preapproved early:  You may think you know your credit score

Preapproval Letters Defined

What should a preapproval letter contain?

Relocating to Washington State and getting preapproved for a mortgage

Is my Preapproval Letter Still Valid wth all the Rate Changes?

Planning Your Funds for Closing

Funds for closing when you’re buying a home

How much do I need for a down payment?

Gifts from Parents:  FHA and Conventional

We’ve just started the process with this post addressing considering buying a home to getting preapproved!  Watch for future post where I’ll organize articles I’ve written on being in a transaction.

What Should a Preapproval Letter Contain?

This isn’t the first time I’ve written about preapproval letters at The Mortgage Porter…however it has been a while and I would say that with all the changes in the mortgage industry, your preapproval letter is more important than ever.  Most Seattle area real estate agents will not accept an offer on a home that’s listed for sale without a bona fide preapproval letter.

Preapproval letters may vary in appearance and content from lender to lender.   Some mortgage companies may have different protocal for when a preapproval letter may be issued.   When I provide a preapproval letter, it means that I have a complete loan application, most likely with exception to the property address since the home buyer has not yet identified a home.   It also means that the home buyer (i.e. borrower) has provided me all the necessary documenation that supports or backs up the information that has been provided on the loan application, such as

  • income documenation (to make sure they qualify for the proposed montly mortgage payment)
  • assets (at minimum, enough to cover the down payment and closing costs)
  • credit report…everything seems to be based on your credit score from potential interest rates to what you qualify for.   This is something that we need to pull if you are interested in obtaining an actual preapproval.

A good preapproval letter should address all of these items so that the seller and the real estate agents know how qualified the home buyer is.  This is done in a manner in which not to violate the buyers privacy.  For example, a seller or real estate agents should not see the buyers income, assets and credit scores.  If a buyer wants to share that information with someone other than their mortgage professional, it is up to them!   Instead, the preapproval letter will address that these items have been reviewed and are acceptable. 

For example, I might include something like this in a preapproval letter:

This preapproval is due to your job stability and excellent credit.  Funds to close this transaction are from your personal savings and a seller contribution in the amount of $5,000.

You can see that I have addressed income, assets and credit in this paragraph. 

My preapproval letter also includes program type, the sales price and loan amount.  Every so often I’ll have a real estate agent want me to leave the sales price blank.  This is something that we can do IF the borrower has substantial cash reserves.  I’ve found that some home buyers would rather not have their preapproval letters written this way…and I’m happy to provide several preapproval letters with staggered sales prices (as long as the borrower has documented the funds for down payment and closing costs).

You may find a total mortgage payment on a preapproval letter.  This is because borrowers are qualified by their mortgage payment since loans have a certain allowed debt to income ratio.  If a borrower is a little pushed with their ratios and they find a home within the sales price and loan amount they are preapproved for, but the property taxes or home owners insurance are higher than estimated or mortgage rates climb higher than what they were approved at, you no longer have a preapproved buyer.   Whether or not your mortgage originator includes what payment you’re preapproved for, it’s important to ask.

Any conditions to the loan approval should be included on the preapproval letter.  Standard conditions on our preapproval letter may include:

  • satisfactory purchase and sales agreement
  • satisfactory title commitment 
  • subject to appraisal 
  • subject to changes to financial situation as disclosed on the loan application (i.e. changes in your employment, debts or assets may jeopardize your preapproval status).

Preapproval letters may also have an expiration date.  Before our current lending environment, preapproval letters would be valid for a longer period of time.  Now credit reports and other supporting documentation “expire” earlier.  Should your preapproval letter expire, they’re typically easy to update by just supplying your latest supporting documentation (paystub, bank statement, etc). 

The letter should have a date and be signed by whomever prepared the letter with their contact information. 

When I prepare a preapproval letter for someone who’s buying a home located in Washington, at the very least, they have gone through preliminary underwriting.  If a mortgage originator has not obtained your documentation or if you have not completed a loan application, you are probably just prequalified and not preapproved.

With HUD’s new Good Faith Estimate, unless you have a property address, you may not receive a good faith estimate with your preapproval letter.  This is a glitch with RESPA that I hope HUD finds a way to correct.  Even HUD admits that if a mortgage professional provides a good faith estimate without a property address, they’re doing so at great risk (due to the financial liabilities packed in the new Good Faith Estimate).   Your mortgage professional can provide you with a “work sheet” until you have a transaction (property address).

If you are shopping for a home anywhere in Washington state, I’m happy to help you become preapproved. 

Why It Pays to Get Preapproved Early: You May Think You Know Your Credit Score

I recently met with a couple who had relocated to the Seattle area and were ready to make an offer on a home.  They’re very qualified with their income stability and enough savings to put a twenty percent down payment on their next home.  What surprised them was the credit report.  [Read more…]

Is My Preapproval Still Valid with all the Rate Changes?

iStock-000018668640XSmallMy clients and readers ask such great questions…I just received this one from one of my clients that I’ve been working with since June of this year:

“…with all the rate changes how is our pre-approval looking? It the original amount still applicable?”

 

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Tips for homebuyers and sellers

Yesterday I was interviewed by Melinda Fulmer for a MSN Real Estate article.   Here were a few of my pointers (with some clarification) for buyers:

1.  Plan on having a down payment.  FHA allows for a reduced down payment which can be gifted or loaned by family members, as does USDA and VA. However I do like to see those shy on savings practice making mortgage payments to a savings account until they have at least 6 months of mortgage payments “in reserves”.   This account is not to be used for your down payment–it’s in case of an emergency.

2. Be picky when selecting your loan originator.  I do believe in getting referrals from people you financially respect.  You can also try “googling” their names to learn more about the loan originator and their qualifications.

Borrowers may be better off working with loan originators who have are able to provide FHA loans–even if they’re not considering FHA financing.  Many conventional loans are having to switch to FHA financing as the underwriting is more forgiving and rates may be better depending on mid-credit scores.

3. Get prequalified as soon as possible.  This is a good way to get to select your loan originator (this is not the same as a preapproval).  During this stage, you’ll be able to see how detailed oriented the LO is what their personality is like–what type of programs do they recommend.  A LO should provide you a Good Faith Estimate without any commitment from you.

4. Rate lock strategy.  Ask your LO what they can do if rates improve after you lock.  Right now, with the turbulent markets, many lenders are offering free rate float downs as long as the lock meets specific criteria.  This provides borrowers with the assurance that the rate will not be higher than the current rate lock and that should rates improve, they may have the opportunity to “float down” to that rate.  Do make sure to obtain a written lock confirmation.

For sellers, I suggest that they insist on a preapproval letter to be included with their offer.  They should also carefully read the letter, it should address the buyer’s credit, income/employment and where the down payment is coming from along with the type of loan they’re approved for. Preapproval letters are sadly not worth more than the paper they’re written on, however they can provide you with some clues about the lender the buyer is working with.  If a seller has two identical offers, the buyer’s lender can make a huge difference in whether or not the transaction closes smoothly.