Pre-Qualification Letter vs Pre-Approval Letter vs Commitment Letter - Knowing the differences

 

 

WARNING - Common sense prevails here..... 

 

Does this sound easy to answer? Which came first, the chicken or the egg?  How about this question.... Do you know the difference between a pre-qual letter and a pre-approval letter?  Both answers could differ greatly, depending on who you speak to and who is a professional on the subject matter and who isn't. I just wanted to dig a little deeper into this. There seems to be a major misunderstanding in my opinion.

You first need to read this post by Steve Kappre & the comments: Pre-Approvals that pack a Punch (or real Pre-Approvals) - He did an excellent job of doing a quick breakdown of what his pre-approvals consist of and how he operates. This prompted me to continue this discussion after reading some of the comments.

 

 

 

 

Pre-Qualification vs Pre-Approval

 

Keep in mind that these definitions/explanations are not from Webster or an online site, but that they are based on my opinions with 16 years in the mortgage industry.

 

Pre-Qualification Letter - The loan officer screens the borrower while asking questions and pulling their credit. I wrote a blog on the types of questions that I ask. Is pre-qualifying rocket science?  Each loan officer has their own way of asking specific questions. I am not here to say which is right or wrong. But I will say that some of these questions are never asked in the initial screening process.

 

Pre-Approval Letter - There are a few ways to look at this. In my opinion, and from talking to a few seasoned loan officers; you should be collecting pay stubs, bank statements, and running a credit report. Depending on the type of work that the borrower performs, you might need W-2's and or tax returns. If it's a complicated pay history, then you need to order a VOE, verification of employment. This will tell the story of that borrowers' pay history for the last 2 years and their year-to-date.

Once the information is verified, you then run it through one of the different automated approval systems. Then the documents should be verified and reviewed by an underwriter. Now, here is where the debate comes into play.

By having an underwriter or a junior underwriter review these documents, you are essentially giving them a full approval. In Steve Kappre's case, he reviews the documents himself and then runs it through the automated system. Hey, I have no problem with this, because Steve is experienced and I know he knows what he is doing. Besides, Steve and I have spoken on several occasions.  But from the technical word of Pre-Approval, essentially what this means is that you are approving the borrower without a property address. Let me ask any of you this.  How would you define approval? Answer?  Please leave me your answer below.  Then what would pre-approval mean????

 

Commitment Letter - Now the fun begins and who said mortgages were boring.  You can basically say that a pre-approval letter should be like a commitment letter. With a commitment letter, you already verified income, assets, and credit. There would be other conditions on the commitment letter though.  If an appraisal has been done or not, that would be on there. Another condition would be for clear title and homeowners insurance. The rate and term would also be on this commitment letter.

 

 

 

As stated, this can be an interesting topic with varying answers. I am not saying that my statements are 110% correct, but I will be stern with my statements to say that I would love for anyone to debate them, to tell me that I am off base per se. Here is the reason why...

In order to offer a pre-approval letter without running the documents through underwriting and in some cases, not even asking for documentation upfront, but taking the word of the borrower (yes, loan officers actually do this), you need to be better than good. Even a good loan officer might miss these items, which could cause caos prior to settlement. Here are some of the items in question :

• if you don't know how to read a pay stub in calculating their income - ie : if the borrower is paid twice a month and not every 2 weeks, the calculation is different. - 24 pay periods and not 26 pay periods.
  
• or that you don't look at the details of the bank statements and didn't notice any large deposits, which need to be explained no matter what
  
• or on the pay stub, you missed their child support payments
  
• or not going over their credit line by line, but just assuming that their credit score fits the program, that you are okay....

 

 

 

Conclusion : Yes people, this happens more often than one would think. Loan officers such as Steve and myself are good enough to be able to hand out a pre-approval based on what we have asked and sometimes see. Hence why I tell most realtors that my pre-qualification letter is just as good as my pre-approval letter. If I don't feel comfortable with the debt-to-income ratios, then I run it through the automated underwriting system. 

Overall, I would say many loan officers aren't experienced enough or knowledgable enough to give out a pre-approval letter, let alone a pre-qualification letter. Remember Houdini? Let's assume this, that I am a magician, that I think I am good and that I know what I am doing. Could I perform his underwater tricks while handcuffed and come out alive?  I would bet not.  The same thing with the average loan officer, who couldn't perform the same with a pre-qualification letter. People, the loan officer needs to know what they are doing and not just assume. Many questions aren't asked in the beginning. I know this after screening the borrower in which they have spoken to a few other loan officers. Yes, it's that scary and it's the truth. This is not to scare homebuyers, but to make them more educated.  Again, please read my pre-qualification steps and match them with the other loan officer. If they don't ask 80% of these questions, it could be a rough ride. What questions should be asked when you are being pre-qualified for a mortgage?   PS.. keep in mind, these are my opinions.

 

IMPORTANT QUESTION : Loreena Yeo asked this question - Question #14 about approvals - Yes, you can get an approval without having a property. You can still get a commitment letter without the property address. Hence my whole issue about pre-approval letters. In reality, it should be the same thing. It's more work for the lender, but it's official because an underwriter has reviewed all of the documents. I have done this and what is usually subject to verification is the appraisal and title work. Almost everything else has been verified and approved. The address on the commitment letter would have TBD, to be determined.

The problem with this step is that most lenders wouldn't go this far now, because many are 20 days in underwriting and 45 to 60 days to close a loan. But you know what, at Infinity Home Mortgage, we still underwrite loans without appraisals in some cases. If the file is ready for the underwriter, but we don't have the appraisal, we still turn it in. We will even underwrite an appraisal as we still process the loan. In tough times, you try to be proactive.

 

 

The difference between a Pre-Approval and a Pre-Qualification letter. - Another blog of mine on the same topic., just with a different twist and view.

 

 

 

                    

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