April 10, 2017
There are a couple of terms in the mortgage industry that
sound familiar and while many think the terms are interchangeable they’re not.
Those two terms are pre-qualification and pre-approval. Similar, but different.
But it’s important to understand the basic difference between the two terms and
while they cover the same aspects of someone’s ability to obtain a loan
approval one is vastly more important than the other. A pre-qualification is a
determination, based upon a conversation with a loan officer that person could
qualify for a home loan along with a monthly payment schedule and an
approximate loan amount. A pre-qualification is good for a future buyer to find
out how much is available but a pre-approval takes the process one step, major
step, further- verification of the information provided.
A telephone conversation is general in nature and the loan
officer would ask you how much you make each month, your current monthly credit
obligations as well a general overview of your credit history. Based upon that
conversation you can obtain a letter that states you are pre-qualified for a
loan. But when getting into an agent’s car to look at homes or submitting an
offer with a pre-qualification letter you might be turned away.
A pre-approval takes the income, credit and asset information
to the next level by verifying the information on your loan application. For
example, if your loan application states you make $6,000 per month your lender
will ask for your most recent pay check stubs covering a 30 day period and
compared what appears on the loan application with your pay stubs.
If you told your loan officer you had good credit the loan
officer will provide documentation of your credit history by pulling a credit
report and requesting credit scores after receiving your loan application. The
credit report will show your payment history, how much you owe each month
compared to your available credit lines, how long you’ve had credit, the types
of credit used and any recent inquiries for new credit. These five factors
incidentally compare your credit score.
Finally, your loan officer will provide you with a cost
estimate regarding how much cash you need at the settlement table. In addition
to funds needed for a down payment you’ll also need money for the closing costs
associated with obtaining a mortgage. Beyond these costs lenders may also ask
for an amount referred to as “cash reserves” which is a dollar amount expressed
as the number of mortgage payments. If the loan asks for six months of cash
reserves and your principal and interest payment is $1,500, property taxes $400
and insurance $200 each month, your total monthly payment is $2,100. Six months
of reserves is then $12,600. Reserves aren’t closing costs but if a loan
requires them you’ll need to show you have them. Cash for closing, down payment
and reserves are verified reviewing your most recent bank statements.
It doesn’t take very long to receive a pre-approval and once
you submit a loan application and supporting documentation you should have your
very own pre-approval letter in hand within 24 hours.
For more information or questions about mortgage loans, please call (855) 757-8748.