People don’t understand how knowing the difference between pre-qualification and pre-approval can make a huge difference in an offer being accepted, and how the right choice can make them a stronger buyer. It’s extremely important! Luckily, my friend Jay Vorhees at JVM Lending broke it down for us:
Panicked Borrower on Verge of Losing Deposit
We had a borrower in contract come to us a few weeks ago in panic mode. The reason? He was on the verge of losing his earnest money deposit b/c his loan had just blown up at America’s largest mortgage lender.
The loan officer had only done a “pre-qualification” and had missed a major issue with the borrower’s commision income. We were able to salvage the deal and still close on time, but the risk to the borrower was enormous.
Pre-Qualification vs. Pre-Approval
Most lenders only “pre-qualify” borrowers. Pre-qualifications consist only of a perfunctory glance at a credit report and a few income documents. Most lenders do not do full pre-approvals b/c they require so much more work.
We do full pre-approvals b/c they are absolutely necessary. Full pre-approvals (1) allow our borrowers to make non-contingent offers; (2) ensure there are no major issues missed; and (3) allow us to close in 14 days b/c we do all the work on the front end.
In other words, full pre-approvals make our clients’ offers far more competitive, and they eliminate stress for everyone – buyers, sellers, Realtors, escrow and us :).
Full pre-approvals can take several hours, requiring us to review income, asset, employment and credit documents with a fine-toothed comb. But experience has shown that they are well worth the effort.
Issues that can be missed with only a “pre-qualification” include the following:
- missed 2106 expenses;
- unexplained and unusable deposits;
- side businesses with losses;
- K1 and partnership losses;
- spousal and child support obligations;
- lack of employment seasoning;
- lack of bonus seasoning;
- lack of commission seasoning;
- debts not on credit reports
A major source of our business includes transactions that blow up at other lenders b/c the loan officers only did pre-qualifications. Realtors come to us b/c they know we can make the deals work and also b/c we can usually still close within the remaining contract time.