When you start to look for a refinance or purchase there are many ways to go about obtaining a quote or seeing what amount you may qualify for.
From a phone call to a local lender or a major corporation lending across 50 states, maybe from a website that helps collect info to send it to a few brokers or a family friend that comes over to help provide the support you need.
In any of these scenarios and all scenarios the steps we highlight in this article will give the insight to help borrowers better understand the differences between a pre-qualification, a pre-approval and a loan approval.
By having a clear understanding of what each of these terms means it will help you avoid false expectations.
Unfortunately, in the mortgage industry advisors get so caught up in “getting the deal” they focus more on making the numbers work over providing accurate information.
By properly defining and outlining how the process truly works The Mortgage Mentors hope to help borrowers avoid that hassle.
What steps come first and why? Getting Pre-Approved
When you first apply for a loan there are a series of questions a mortgage professional will go over with you. These are the questions verbally highlight:
- Value of The Home
- Balance or Amount Down
- Estimated Credit
- Property Type – Single Family, Condo, Units
- Residence – Owner Occupied, Investment, Second Home
Most professionals will also highlight where you are receiving your income, how long you have been receiving that income and if it is stable. From there the mortgage advisor will go to his source to generate a quote. The quote will be based on the information that the borrower has verbally disclosed.
The pros of the pre-approval are it is simple. Based on a short call and basic information you can get a general idea of what a lender can offer.
The cons are the pre-approvals are ESTIMATES, they do not verify any information and this can be misleading.
If for any reason when a mortgage professional reviews the documentation consisting of their credit, income and property info this quote can change.
This is why it is important for advisors to explain the importance of being truthful during these questions and for the borrowers to have accurate information.
Unfortunately, a common occurrence is borrowers disclosing just enough info for them to get the answer they want to receive and the advisor more focused on the next steps then providing an accurate quote.
This puts mortgage professionals and borrowers in an uncomfortable position when coming to locking the loan or going over legitimate terms.
We have all heard countless stories of “bait and switch” which the majority of the time is not the intention of the lender. It is simply a mistake, a mistake that comes from inexperience and the scare of losing a possible deal.
What is the difference between a Pre-Approval & a Pre-Qualification?
Understanding the difference between a pre-approval and a pre-qualification can help you save time and set the proper expectations. This stage should be made clear by whatever mortgage profession or service you are working with, if it is not, that is your first red flag.
Once you go through the steps of being pre-approved borrowers are typically provided with an initial estimate as well as a borrower’s packet consisting of the documents needed to verify the information disclosed and provide a Pre-Qualification. The qualification will verify the income, credit and, depending on if a refinance or purchase, the property information.
If this is for a PURCHASE the importance of providing proper documentation & information is critical to accurately estimate the purchase price, loan amount and program the borrower has approved for. Typically a lender will give you a Loan Approval Letter and/or a DU Approval to verify borrower eligibility. When placing an offer on a home most realtors will require one of these documents. In the worst cases, borrowers fall in love with a home and end up not qualifying.
The majority of articles and mortgage professionals paint the Pre-Approval like the finish line. That once your income is verified, your credit has been run and property documentation reviewed the borrower is in a position to close. Unfortunately, that is not the case.
In mortgages, there is a level of checks and balances. You have a mortgage loan officer, a processing team, an underwriter, and many other positions.
The three listed are the main positions a borrower will hear during the process on the lending side. A mortgage loan officer helps the client best understand programs and rates, a processor is a liaison between the underwriter and loan officer and finally, the underwriter is the final say.
The Underwriter issues Loan Approvals by verifying all information given by escrow, title, the borrower and mortgage loan officer.
Why is a Loan Approval so important and how does it impact me as a borrower? Taking a deeper dive.
The key step many tend to overlook the importance of is the Loan Approval. The Loan Approval will consist of a list of outstanding conditions the Underwriter is requesting from the borrower to satisfy guidelines. The reason this is a key step is that if for any reason you CANNOT satisfy any of these conditions you will not be able to close your loan.
Once your mortgage advisor has reviewed the conditions, referred to as Prior-to-Doc (PTD) Conditions, they will have a clear understanding of how to help you satisfy the Underwriter. PTD conditions can range from judgments or tax liens to updated pay stubs needed. Some are difficult, while others are more simple. List of some PTD Conditions:
- Property or Tax Liens
- Judgments on Borrower
- Updated Documents
- Letters of Explanations
Once the borrower confirms they can satisfy those conditions it is best to lock the loan and order the appraisal. All mortgage advisors should explain the importance of Loan Approval as a standard. It is alarming to find most articles and lenders only highlight the differences in Pre-Approval V.S. Pre-Qualification which at points can be misleading.
There are a few reasons not to lock and or order the appraisal which will cap off this article. The main reason to be cautious is an appraisal and credit reports are always covered by the borrower.
Appraisals are always ordered through a third party AMC and once completed there are NO REFUNDS. Appraisals are also only good for 30 to 120 days depending on the program and lender.
Locks are also only set for a period of time, usually, 17 to 60 days, if for any reason the borrower goes over that period there is a fee which is referred to as a Lock Extension.
This is why the Loan Approval is the most important of them all, it is the true Approval that will let you know any and all items needed to get the borrower a CLEAR TO CLOSE!
WHY DID WE WRITE THIS ARTICLE?
We wrote this article to give you more clarity on the mortgage process. Our mission is to provide transparent information so borrowers can enable themselves to be homeowners.
When purchasing home emotions are high on all ends. When emotions are high our judgment is sometimes cloudy. A borrower should be able to rely on a mortgage professional to help them better understand. We have noticed at some points lenders, advisors and so forth are more focused on closing the deal and do not pay attention to detail.
Our focus is that detail, showing you every stone you need to turn over and helping you understand why. With proper clarity, time and effort we believe we can help anyone become a homeowner.
WHO ARE WE?
The Mortgage Mentors are a team of mortgage professionals who have a passion to create homeownership. Each of our Mentors believes in not only helping you purchase your home but owning your home outright, free and clear. Our life focus has been finding the most efficient, effective and beneficial programs for anyone from first time home buyers to investors.
On our journey to create a safe, transparent loan process for individuals we have found countless tools & resources that we hope to share for FREE with borrowers, mortgage professionals, realtors, and investors.
At The Mortgage Mentors, we have more than just a business, we have a belief. A belief that mortgage can help create financial freedom, we want to share that information and build with you.
Many loan programs work differently than traditional programs presented in the ones above. All terminology, references, and process are subject to change depending on circumstance.