In this second part of my series on mortgage lending, we'll discuss "underwriting" and the difference between being "pre-qualified" or "pre-approved" for you mortgage loan.
In the Covington real estate market, for every mortgage loan transaction, the lender must determine how risky it is for them to give you a mortgage loan. Lenders have much more vigilant in today's market due to the high default rate on mortgages in the U.S., and rightly so. After all, lenders are the ones who take the risk that you and I, as borrowers, may default on the loan and not repay our debt. To assess their risk, lenders use a process called "underwriting." That's a term I'm sure you've heard, but may not fully understand.
In mortgage lending, underwriting is simply a detailed credit analysis the lender does before they will grant you a mortgage loan. The term derives from the Lloyds of London insurance markets several centuries ago. 
Financial bankers of that time who agreed to accept some of the risk of a given venture (typically a sea voyage - with the associated risk of sailing off the edge of the world), in exchange for a premium payment, would literally write their names under the risk information written on a Lloyds document (insurance policy) created for that purpose. Thus, the term "underwriting."
So, why are we talking about underwriting before even beginning to look for the perfect home for you? I've already said that underwriting is the detailed credit analysis the lender does before they will give you a loan. So doesn't that come later in the home buying process after you've found your dream home and written the seller an offer? No... it should come right up front. That's the difference between being "pre-qualified" and "pre-approved" for a loan.
It is common for the terms pre-qualified and pre-approved to be confused and viewed as being the same. However, they are very different.
The pre-qualification process involves a quick consultation between you and a lender to discuss three things...
- The amount of money you have to put towards a down payment, closing costs and prepaid items, escrows and cash reserves. [NOTE: We will discuss all these items and what each means in future articles.]
- Can your income and assets be verified.
- Price range of homes you should look in and how much you can afford and be comfortable with on a monthly house payment.
Your lender will also pull your credit score, and if everything looks all right, give you a pre-qualification letter. This letter tells you and your Realtor® that you've talked with a lender; you are "qualified" to buy a home, and what price range you should be looking in. However, a pre-qualification letter does NOT guarantee that you will ultimately be approved for a loan because your loan has not yet been underwritten.
Most mortgage loans in the Covington real estate market today are underwritten through automated (computerized) methods. This is a more formal evaluation and consultation process performed by your lender resulting in a "pre-approval letter."
In the pre-approval process a loan application is completed, automated underwriting is completed and your credit scores from all credit bureaus are evaluated. Many borrowers, and some Realtors®, assume that obtaining a credit score from a single credit report is sufficient to indicate that a borrower will be approved for a mortgage. But, because there are multiple risk factors to be considered in mortgage loan approval, estimating an approval from a single credit score or report can be very inaccurate and misleading.
The pre-approval process, resulting in a pre-approval letter, is the only way to ensure that you can get a mortgage for the amount you need as long as...
- 1. The property appraisal and title are satisfactory
- 2. You can verify all information on your mortgage application, and
- 3. Nothing changes in your financial status (assets, liabilities & employment) prior to closing.
Having a pre-approval letter gives you the insight of knowing what price range you should be looking in, the comfort of knowing exactly what price home you can afford, and the negotiating strength of being able to make an offer and follow through on it when you find the perfect home for you and your family.
You will eventually have to go through the process of loan application, providing your W-2s, pay stubs, bank account information, etc. anyway. So why not do it right up front for a pre-approval letter rather than a pre-
qualification? Pre-approval is the only way to go!
Note that if you would like to check the reliability of the mortgage lenders you might be considering, or those referred by your Realtor®, go to the Georgia Department of Banking website to find information on mortgage brokers, lenders and processors doing business in the State of Georgia.
In the next part of this series, Part 3, I'll tell you about three of the major risk factors lenders evaluate when considering your mortgage loan.
I invite your questions and comments throughout this series on mortgage lending in the Covington real estate market, and hope it will make you more confident and comfortable about wanting to buy a new home or selling the one you have.
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