Does Your Loan Pre-Approval Hold Water?

By SCOTT SHELDON (Open Post)

If you hear a lender toting they can pre-approve you in just a few minutes, stop and run in the other direction --- fast. A real pre-approval is much more than a loan application and credit report. What to know before jumping into a home…

A Traditional Pre Approval Includes The Following:

• you’ve submitted an application with a lender
• you’ve given the lender authorization to pull your credit report
• you’ve provided all requested supporting documentation
• lender has specifically reviewed all supporting documentation including your tax returns and every piece of financial documentation
• lender has determined you meet all credit guidelines based on the financial strength of your credit, debt, income, and assets
• lender has communicated to you what monies needed for closing, total mortgage payment as well as all suitable programs you qualify for
• lender has run your scenario through automated underwriting

Nearly all the residential loans being originated to Fannie Mae or Freddie Mac standards must pass automated underwriting through Desktop Underwriter (DU for short or Loan Prospector (LP) for short. Each loan is carefully run through an automated underwriting system whether you’re looking for a conventional mortgage, FHA mortgage or even a jumbo mortgage. If your loan does not pass automated underwriting more than likely, your loan is not moving forward. It’s absolutely critical in the information-gathering stage after the lender determines how you can afford they run an automated underwriting approval to make sure your loan gets the green light. Most loans do receive “pass” in each system provided lender has done their proper loan analysis and have inputted the numbers from the supporting documentation you provided.

Are You Prequalified or Preapproved?

If there is any step overlooked in any of the above referenced aspects of your qualifying integrity, you are not pre-approved. A good lender who knows what they’re doing will typically ask you a series of questions pre application to determine whether or not you meet credit score requirements, down payment requirements, coupled with debt and asset requirements. In other words, you can’t go get preapproved without getting prequalified first. A prequalification does not hold any water. Real estate agents want you to be pre-approved, many times before even showing you a home. A prequalification is simply a verbal conversation with your loan professional about your financials, that’s it. It holds no water in a real estate purchase contract offer situation.

However, a pre-approval letter conveys to the home seller you’ve diligently done your leg work, and more importantly, you have the ability to perform.

The Fate of Your Home Purchase Rests With How Strong Your Pre-approval Is

Did your lender ask you a series of questions about your credit score, credit history, income assets and monthly obligations? Did it feel like your lender was grilling you with questions about your finances? These are good signs you have a professional in your corner. A good lender will question everything to better understand you, your finances and determine if you can qualify. Most real loan officers need at least a few hours after having the complete application, credit report and documentation to review your figures, especially if there is any of the following:

• previous foreclosure, short sale or bankruptcy in the last 7 years
• previous loan modification of any kind in the last 7 years
• high consumer debt payments like income based student loans, car loans, credit cards, tax, child, or alimony payments
• gyrating income
• 2106 unreimbursed expenses on your tax returns
• any and all self employed income
• all investment property scenarios
• or anything lender deems as complex

Any lender or mortgage broker that offers a pre-approval letter and a quick cursory review of your financials is gambling with your money which could up costing you your earnest money down the road, especially if the underwriter later determines something in your financials does not jive. Be smart and give the time the lender requests for doing a solid preapproval and allow them to do their analysis.

Don’t Put The House Before The Finances

This is undoubtedly an “aha” moment as the allure of real estate is far more fun and exciting than the idea of getting a mortgage. Let’s be honest putting together tax returns, deputies, pay stubs and financial documentation for most consumers is not the most pleasant thing in the world to do, understandably. Picture this -- for whatever reason you’ve not gotten pre-approved yet, work, family, or life got in the way. You find a house on Sunday afternoon that you ‘must have’. It is the ideal home for your family with location, and all the other bells and whistles. Offers are due the next day Monday at 12:00 PM sharp. You call a lender or one the real estate agent recommends and demand they preapprove you on the spot for you to get your offer in for consideration.

This is a recipe for disaster. Not only is it reckless with asking the lender to cursory review your financial documentation, but also sets you up for a more questions and more conditions from underwriting later on because the lender did not have the time necessary to devote in examining your financial profile earlier on.

Get your finances lined up before you start looking at homes. You will be glad you did many times over once you do find a home that is a fit for you.

• Also see: What $42 Million Will Buy You In The East Bay Hills

• Previous columns from Scott:
• Refinancing? 3 Mortgages That Require Less Documentation
• What To Know If Considering A 15-Year Mortgage
• How To Keep Costs Low When Taking Out Conventional Loan.

Scott Sheldon is Senior Loan Officer and consumer advocate based in Sonoma County. Scott has been originating home loans for nearly decade. His weekly consumer articles offering key mortgage insight and credit tips can be seen in Yahoo! Finance, AOL Real Estate, Business Insider, Realtor.com, Fox Business, MSN Money and many others.