So you’ve been pre-qualified and are serious about buying a home. Great! Now it’s time to move on to the next step: the pre-approval.
So how does a pre-approval differ from a pre-qualification? A pre-qualification is basically an opinion of what you can do. The pre-qualification goes a step beyond that to actually approve you from a credit perspective. My way of looking at the difference is you get pre-qualified to see what you want to do, and you get pre-approved to be in a position to actually do it.
What does the lender need to do a pre-approval? Lenders need to do two things: gather documents and information, and compare the borrowers’ financial position to the guidelines for the program the borrowers want to use. To do that, they must verify income, verify assets and verify credit. The items needed to accomplish these things will vary depending on the borrower’s individual situation. However, there are a few things that will almost always be required:
1) W-2s from the last two years.
2) The most recent paystubs covering the last 30 days.
3) the most recent bank statements for all accounts that may be used to purchase the home.
In addition to these things, there are a few additional items that it would be good to get to the lender. Some of these items are probably going to be required ultimately anyway, and getting them to the lender at this point my avoid problems down the line. The list of these varies greatly depending on individual circumstances. Among these items are:
1) Full federal tax returns for the last two or three years
2) Retirement account information 401(k,) 403(b,) IRA, Roth IRA, etc.
3) School transcripts (if out of school less than two years)
4) Divorce documents/child support documents, etc.
So is a pre-approval a guarantee of ultimate loan approval? Unfortunately no. There are several reasons for this. The main reason, however, is pretty simple: a pre-approval is based on a snapshot, and if any element in that snapshot changes, the approval is no longer valid. For the borrower this could be: a change in credit standing, a change in employment, a change in debt, or a change in assets. For the lender this could be a change in loan programs, a change in guidelines (this one is especially problematic,) or even a change in interest rates. And this is not even addressing the thing that currently causes the biggest problems: problems with the property – which include more things that I will go into here.
So why even bother? Because it’s far better than not doing anything. Obviously, the more marginally a borrower is qualified, the bigger the issues could be. Someone with a 621 credit score could easily drop below that magic 620 number (the effective minimum score for most loan programs.) The person that barely qualified for $185,000 probably can’t buy at that price if the rates go up even a little bit. That’s why when I pre-approve borrowers I typically use a rate that is about .25% higher than the current market. I will also sometimes assume a higher payment on an obligation than the credit reports indicates – just to have that little safety margin should things change a bit more than expected. (Oh and also – you probably won’t believe this – sometimes buyers that I pre-approve for one price will fall in love with a home, negotiate for that home, and wind-up in contract for more that the amount I pre-approved them for. No… really!) The other reason is really simple – if you don’t have a pre-approval, most agents won’t even present your offer to the seller.
How long is a pre-approval good for? This is an impossible question it accurately answer, but I’ll try. The real answer is that as long as the borrower’s financial situation does not change, and as long as the rates, programs, and guidelines don’t change, the pre-approval will still be valid. That could be for one day, or one year – totally depending on the individual situation
What about the documents, do they expire? Credit reports are only good for 60 days, and the bank statements, paystubs, etc all have to be less than 30-days old when we submit the application for final underwriting. But unless there is a change in status I personally don’t update these items until the borrower identifies a property that they are going to pursue. At that point it may be a good idea to update the file, and perhaps even re-pull the credit just to be sure.
Are there different types or of pre-approvals? Are some better or more reliable than others? Absolutely. The three types of pre-approval are: full-underwriter approval, computerized approval, and lender approval. Full-underwriter approval is the best, but almost never possible in today’s lending climate. I will occasionally have a specific issue addressed by an underwriter if I have a question – just to be safe – but typically underwriters are too busy to look at pre-approval packages. The computerized approval is usually what most lenders will be able to provide, but even that is not a guarantee; if the loan officer (or mortgage loan originator as we are now called) incorrectly calculated or interpreted any of the information that was used to render the decision, the” findings” will be unreliable. The last type: the lender pre-approval is really just a glorified pre-qualification, but that might be fine for the borrower with an 825 credit score and 50% down payment.
So how can I be sure we are really pre-approved? The real answer is you can never really be sure of anything – especially in lending – especially right now. However you can make sure that the loan professional has sufficient experience, knowledge and ability to do their job. Bottom-line: work with a professional.
So what should I do after I’m pre-approved? Go buy a house! No, really all you need to do is keep in contact with the lender and let them know if you change ANYTHING in your financial profile. In fact, unless you absolutely have to DON’T DO ANYTHING TO CHANGE YOUR FINANCIAL SITUATION! Don’t get a new job, buy a car, buy furniture for the new house, co-sign for a loan, spend you cash, close a bank account, transfer money, get a gift, etc., etc., etc. Remember, anything you do can affect your loan qualification. Keeping the communication going will eliminate a lot of problems down the line. If you have a question, call. Other than that, have fun looking at houses!