I posted blog title "How Do I Get Pre-Approved For A Mortgage" on Sunday and a comment by Edith Schreiber stated:
"Perhaps you can help me to understand why there are mortgage professionals who still use "pre-approval" and pre-qualification" interchangeably...???"
I do not know why Loan Originator's use the term Pre-Qualify if they really mean Pre-Approve, or vise versa, but Edith's comment got me thinking that I should do a blog describing what I consider to be the difference between a Pre-Qualificaton and Pre-Approval Letter, as well as a third option which is formal Pre-Loan Commitment Letter. Please keep in mind that there are no official procedure or Definition Of A Pre-Qualification, Pre-Approval, & Pre-Loan Commitment Approval Letter. The definitions that I am providing below are mine, and could very well be defined differently by another Loan Originator.
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Pre-Qualification Letter: Loan Originator inquires about income, bank information. and maybe pulls credit. From that the Loan Originator makes a quick determination of whether the Borrower could possibly qualify for a Loan up to a certain dollar amount. (Normally done by phone)
- Pre-Approval Letter: Loan Officer pulls credit, calculates income based on information verbally provided by the Borrower, and inquires about bank information and other liquid assets. The Loan Originator then goes on to take a full Loan Application (1003). If the Borrower has access to a fax or scanner the Loan Originator make ask the Borrower to send them paystubs, and Tax Returns if there is uncertainty about the income. This is often the case with self-employed, or commission income borrowers. The Loan Originator then runs all this information through Desktop Underwriter (DU) or Loan Prospector (LP) along with a hypothetical Sales Price, and looks for an Approved/Eligible or Accept. (Normally done by phone or in person)
- Pre-Loan Commitment Approval Letter: The Loan Originator does everything that he or she would do if there was a property, pulls credit, collects paystubs, bank statements, W2's, tax returns if required for the loan program that the Borrower will be applying for, and all other documents that may be required from the Borrower. The Borrower then signs a Loan Application (1003) along with all disclosures. The loan package is submitted into Underwriting, and the Underwriter then request tax transcripts from the IRS, verifies employment, and everything else that would be done for an actual Loan, including paying an Application Fee. The only thing that would not be done is an appraisal because at this point there is no property to appraise. The Underwriter then issues a Loan Pre-Loan Commitment Approval Letter up to a certain dollar amount, based on a property being able to appraise later once a property is found. Once the Borrower goes under contract all that remains to be done is for the property to appraise for the Sales Price. If it is more than 30 days between the approval and the Borrower going under contract, then paystubs and bank statements may need to be updated. At McCue Mortgage we refer to this as a "Buyers Edge" (Normally done in person)
Again these are MY definitions, other Loan Officers will have their own, including equating a Pre-Qualification Letter to a Pre-Approval Letter, because that is what they do for their Pre-Qualification Letters. That is why it is important to ask each Loan Originator what their process is when they Pre-Qualify/Pre-Approve a Borrower.
Of these three Pre-Qualification/Pre-Approval procedures, obviously the Pre-Loan Commitment Approval is the best and most certain. But even though it is the best, it is the least practical.
Most Borrowers do not have the time to go through the third option, because they have already identified a property that they want to make an offer on, or believe that they will soon find a property that they want to make an offer on. The third option takes the same amount of time as a Loan Commitment does once the Borrower goes under contract. Also most Realtors and Borrowers do not want to wait 2-3 weeks before they can go out looking at properties.
For these reasons the process that I use with a Borrower is the second one, the Pre-Approval process that I described above. I never do the first, and I will absolutely not issue a Pre-Appoval Letter under any circumstances if I have not completely done the second procedure, and gotten an Approved/Eligible through DU.
My Pre-Approval process is not a certain, but it is as close to one as any Borrower is going to get to an approval short of the Pre-Loan Commitment Approval process. OK this blog is a lot longer than I intended it to be, but I wanted to make sure that I clearly explained my Definition Of A Pre-Qualification, Pre-Approval, & Pre-Loan Commitment Approval Letter.
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Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or gsouto@mccuemortgage.com
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