Many clients ask “why is a pre-approval letter necessary?”, since a pre-qualification was already done. To answer this question, I thought we’d explore what each phase of the process entails to get one to the actual mortgage loan. A pre-approval letter and pre-qualification letter are not the same. Neither one is a guarantee that a lender will give you a loan but the pre-approval letter holds far more weight than the pre-qualification letter. The ultimate goal for a borrower is to obtain a commitment letter from the lender. Let’s look at each one and see what the difference is.
Pre-Qualification Process
This process is quick and simple and only gives you an idea of how much you might qualify to borrow. There is no application process and the number is based on your word of mouth as to how much income, assets and liabilities you have. The pre-qualification process does not include an analysis of your credit report or an in-depth look at your ability to qualify for a home mortgage loan. Many people use this as an initial step because it is simple, fast and there is typically no cost involved. Often the pre-qualification can be done over the phone or online. It’s important to remember that because it’s quick and based only on the information you provide to the lender, it is not a sure thing!
Pre-Approval Process
The pre-approval process is more involved, requires that you fill out an application and there may be a fee that you need to pay. Pre-approval means that you have given additional information about your income, assets and liabilities and it has been checked and verified by your lender. In this phase the lender has likely already pulled your credit report to learn more about your credit history and your credit-worthiness. Be ready to supply your lender with the following documentation:
· W2 Statements (or 1099’s) for the last two years
· Federal Tax Returns for the last two years
· Bank Statements for the last few months
· Recent Pay Stubs and proof of other income
· Proof of Investment Income
From this information your lender will be able to give you a specific idea of the amount you will be able to borrow. Basically you receive a conditional commitment in writing for an exact loan amount. Once you have this pre-approval letter you have an advantage when dealing with potential sellers and are one step closer to obtaining an actual mortgage loan. This allows you to know how much you can afford before you start looking for a home, as well as the ability to move more quickly once you find the perfect one. Your real estate agent will want you to obtain the pre-approval letter prior to showing you homes. The letter proves that you‘re likely to be able to make a purchase and, therefore, you can be taken seriously. And when the time is right to make an offer on a home, you and your agent will be in a better position to negotiate the contract. Ina competitive housing market, sellers prefer a pre-approved buyer to those who might be unable to close the deal.
The Commitment Letter
Obtaining the commitment letter (“loan commitment”) is the goal for a borrower seeking a mortgage loan. This is the final step and is issued by a bank when the borrower and the property intended for purchase have been approved. In this phase your income and credit profile will be checked again to ensure that nothing has changed since the initial approval. The commitment letter is only issued when the bank is certain it will lend to the borrower.
Obtaining a home mortgage has changed significantly over the last few years. During the height of the real estate boom, getting approved for a mortgage was a simple process. That’s not the case anymore, making it even more important to have a qualified professional real estate agent and lender assisting you through the process. We’re here to answer questions for you so let us know how we can help. Visit our Resources page for our list of preferred lenders and other contractors.
*Blog content reviewed by Mike Eastman.*
Mike Eastman, VP, Loan Officer
1st Portfolio Lending
8300 Boone Blvd., Suite 200
Vienna, VA 22182
o: 703-564-9100 ext.145
d: 571-327-2145
c: 703-906-4716
f: 703-564-9121
efax: 703-822-4250
meastman@firstphc.com
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