What Does Pre-Approval Really Mean?
If you are a first-time home buyer and talk to a realtor, the first question you may be asked is are you “pre-approved” for a mortgage? Within the industry at this time, a great number of regulators, legislators and other agency folks are taking issue with the terms “pre-approval versus pre-qualified” and it is creating confusion for most consumers.
The definitions are really very simple and, if there were a standard within the industry, there would be less confusion.
To begin with, consumers must understand that each state has it’s own regulatory bodies overseeing things such as industry protoccol and terminology. In Virginia, where I am licensed, the regulators are just now working on establishing statewide guidelines for defining “pre-approved versus pre-qualified” and the definitions they are drafting are what I have used since I began to work in the mortgage business. For definitions like these to be universal, they would have to be mandated on a Federal level .
“Pre-qualified” is when a consumer provides the loan officer with specific information and once verified, the loan officer can give the potential borrower a letter stating the loan type, amount and terms the borrower qualifies to receive from a lender. The information provided must include at a minimum name, address, and social security number. It should also include annual earnings, estimated savings and assets and current rental payment, although in some instances, the loan officer may not get this information during the initial contact which is ususally over the phone.
The loan officer will then pull a tri-merge credit report which provides the credit history of the individual(s) from each of the credit bureaus along with their credit scores. After reviewing the credit report and calculating the debt-to-income ratios based on the income and asset information the individual(s) provides, the loan officer can establish how much the individual(s) qualifies to borrow and the general terms of the loan programs for which they qualify.
“Pre-approval” is by definition, a pre-approved loan qualification. This means the individual(s) has provided all the information for a pre-qualification and the loan officer has submitted it to the lender for pre-approval. This process means the lender has reviewed and/or verified certain information provided by the individual(s) and submitted by the loan officer, usually electronically via Fannie Mae’s Desktop Originator or Freddie Mac’s Loan Processor software programs. The lender then provides the loan officer with a conditional approval, meaning that, if the conditions listed on the approval are met, the lender will underwrite the loan.
While a thorough “pre-qualification” is more than adequate for an individual to feel confident they are qualified to begin shopping for a new home, a “pre-approval” does not automatically guarantee that the loan will close. The most important aspect of a transaction, once in progress, is that the conditions remain the same throughout the entire process. If an individual is pre-approved and, for some reason, the income, asset or credit information should change in the middle of the process, it could result in the loan ultimately being denied, even though the lender initially issued a pre-approval. It’s still conditional until all of those items are met to the lender’s satisfaction.
It is important for anyone shopping for a new home to keep in mind that, once the transction is started, they must do everything possible to ensure that nothing in their circumstances change. Don’t go out and buy a new car, don’t take any of the asset money disclosed out of the bank, and don’t change jobs. If something unfortunate, such as an unexpected job loss occurr, inform your loan officer immediately.
Keeping these guidelines in mind as you begin the process of a new home purchase should help reduce the worry and stress of having problems during any part of the transaction.