The purpose of a Mortgage Pre- Qualification or Mortgage Pre Approval is to re-assure the home seller that the buyer is qualified to purchase their home and that the deal won’t go down at the last minute.
These terms can be confusing to both home buyers and sellers. Here’s what they mean and the differences:
A “Mortgage Pre-Qualification” is an analysis of a borrower’s ability to purchase (or refinance) by a mortgage loan officer. Income, funds for down payment and closing costs, monthly debts and credit scores are documented with W2’s, pay stubs, or tax returns, bank statements, and a 3 bureau mortgage credit report.
A complete mortgage application is not required.
This is based upon the mortgage loan officer’s review, analysis, and experience. It will give the borrower an idea of their maximum sales price, loan amount, monthly payments, and cash needed to close.
It is not a guarantee.
A “Mortgage Pre-Approval” takes the above documentation plus a completed mortgage application and is run thru the mortgage agencies Automated Underwriting Systems (AUS).
A mortgage pre-approval can be done on the borrower(s) before a property is selected or on both the borrowers and the property after it is selected.
When this is complete an “eligible” or “ineligible” will be given. If an eligible, the documentation required will be listed. If “ineligible” the reasons will be given. It will also tell if a full interior and exterior appraisal is needed or a “drive by” appraisal with no value given.
The often forgotten point, is that this approval is “subject to” final review by a “human” underwriter.
A Mortgage Pre Approval is a step closer to loan approval, but still not a guarantee.
Here’s Why:
1) The AUS approval is based upon the information input by the mortgage loan officer. This input is based upon the information supplied by the applicant. If there is a mis-entry or incomplete information, the AUS finding will be void and “re-run” with corrected information that could change the findings.
2) Though the government agencies have their guidelines of what they will accept, EACH lender has their specific underwriting guidelines which may be more stringent. A lender may not accept a risk that the agency is willing to. These are called lender “over lays”
3) Finally, a human underwriter must review all documentation, AUS findings, the IRS tax transcripts, lender overlays, and the appraisal.
Additional “conditions” and documentation can be requested from the borrower, appraiser, or lender. When the “conditions” have been gathered, reviewed, and signed off on, the loan is approved. Not until then.
A Mortgage Approval is when a human underwriter has signed off on the borrower(s) and property.
Can you obtain a mortgage approval instead of a “pre-approval” when looking for your next home? It may happen, but, the human underwriter will look at “pre-approvals” after they have handled all purchases and refinance transactions. So, it will be low on the priority list.
Can a “mortgage approval” be reversed? YES!
Prior to closing, a verbal employment verification is done. Some people have actually quit jobs or changed careers while in the home purchase process. Not smart.
A updated credit report may be run the day before or day of closing to determine if there are any new debts since application that would impact the borrower’s ability to qualify and repay the loan. If so, the closing will be stopped.
How should Chapel Hill home buyers and sellers consider an AUS pre- approval? They should realize they have passed the first step in the mortgage process, and that other conditions may appear after the human underwriter has reviewed the file.
Finally, the purchase is not complete until all loan documents have been signed, the closing attorney has received funds from the lender, the attorney has recorded the transaction at the courthouse, and the “keys are in hand.”
Then you are approved and “closed.”
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