Pre-Qual vs Pre-Approval

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:

Image: meyerpottsproperties.com

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.

Why Pre-Approvals?

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 :).

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Image: Masonknowsmortgages.com

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.

Tips for preparing to buy a home

It takes a lot of preparation to buy a home. I know, I know, thank you Captain Obvious, right? But if you’re going to be searching for a home in 2017, I want you to be ready for what is headed your way!

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From our friends at Bank of the West, here is a list of great tips for preparing yourself to buy a home. See my summary below:

1. Fix Your Credit

Your credit is one of the first things a lender will look at when approving you for a mortgage loan. You can get a free credit report once every 12 months from each of the three credit bureaus: Equifax, Experian and TransUnion at annualcreditreport.com. Make sure to check for mistakes and file a dispute with the business in question, as well as the credit agency, if you find any inaccuracies. They must investigate within 30-45 days.

2. Maintain Your Credit Score

Your FICO score is the most common number used by mortgage lenders to rate your creditworthiness. You can get your credit report with a FICO score for free, or for a small fee. Anything above a 740 FICO score will help you secure better interest rates. If your score is lower, you may still qualify for a mortgage, just with a higher interest rate attached. Your first instinct may be to find ways to boost that credit score. Here are two things NOT to do:

– Don’t close lines of credit – it may indicate credit risk and actually hurt your score

– Don’t open new lines of credit – the uncertainty of your spending habits with a new card might indicate risk and cause your score to tick up

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3. Get a Big Down Payment

You’ll get a better interest rate on a mortgage if you have a larger down payment because lenders will think you’re less likely to default on your loan. Aim for a down payment of at least 20 percent of the selling price. This will also protect you from paying private mortgage insurance (PMI), which protects lenders if you default on a loan.

4. Get Pre-Approved

Meet with a mortgage specialist before you start shopping. They can help you determine an accurate budget and decide what kind of home you can realistically afford. Get a pre-approval letter and add it to a good credit report, income verification and a maximum allowable loan, and home sellers will take you most seriously among the suitors.

5. Keep Track of Your Money

You’ll have lots of documents, bank statements, etc. during the pre-approval and underwriting processes. These will be examined closely to verify income and expenses. If your records show unusual activity, you’ll be asked to explain it and you’ll have to jump that hurdle before continuing the approval process.

If you need a recommendation for outstanding mortgage brokers.  I have a few that I highly regard.