A pre-qualification is so meaningless that it is known in the trade as a “Swiss cheese” loan commitment. It’s so riddled with holes that the lender can find any number of excuses not to extend financing.
So, What’s the Difference Between a Preapproval and a Pre-qualification?
A preapproval, on the other hand, means that you have given the lender everything he needs to document and verify that you have the ability to handle the loan. Absent an all-important appraisal, which will show whether or not the home you want to purchase is worth what you are paying, it is the lender’s written promise that you are going to get the loan you need to buy the house.
A preapproval letter also will help define your search for a home. It will say that you can afford to purchase a house worth so much — but nothing more — at a certain interest rate. So in that sense, it should help prevent you from looking at houses that you cannot afford.
It addition, it counts as much more weight when you finally decide on a home. That’s especially true if others want to buy the house too, because the seller is much more likely to go with your offer when you can show that financing will not be an issue.
The Small Print
However, it also important to realize that a preapproval letter is not a guarantee that you will get a loan. Any number of things can still short-circuit your deal.
For example, an appraisal may come in below the home’s cost, which means you’ll have to come up with more cash or the seller will have to lower his or her price in order for the loan to close. Or perhaps a last-minute credit check will discover that you’ve recently made a big-ticket purchase, which will throw your debt-to-income ratio out of whack. And there could be a problem with the title that won’t be uncovered until the home’s lineage is examined.
But otherwise, a pre-approval letter is the next thing to being home-free (or full, in this case).
A pre-qualified letter, on the other hand, is nothing more than the lender’s statement that based on everything you’ve said — but has yet to be confirmed — you are likely to be cleared for a loan in this amount. But it is fast — you can even pre-qualify online in a lot of cases — and relatively painless. And it is usually worthless.
How Do I Get Preapproved?
So what does it take to become pre-approved? A lot of paperwork, verifications and cross-checks. And with new federal lending rules now in place, be ready for a longer, more intensified examination of your financial picture. Lenders want to prove to themselves and anyone else that when you sign on the dotted line, you have the ability to pay back the loan as agreed.
Every lender has its own requirements, but generally, the information below is what you'll need to get pre-approved. As a consumer, it pays to shop carefully for a mortgage.
For one example of how a lender handles pre-approval, take a look at Prospect Mortgage's website. As one of the largest independent retail lenders for home loans, they have offices in more than 150 locations across the nation, in addition to their online presence.
- You and your spouse’s social security numbers;
- A check to cover the cost of a credit report and an appraisal;
- If there are any known problems in your credit history that could scuttle the loan, here is your chance to refute them with a letter to the lender explaining in your own words what happened. For example, your creditor may have acted in error or you might have lost your job through no reason of your own;
- W-2s from your employer for the previous two years and tax returns for the same period. If you are a contractor, or non-employee, you’ll need 1099s from everyone for whom you worked in the last 24 months;
- A list of all your real estate holdings, including present values and amounts still owed. You’ll need the names, addresses, phone numbers, as well as the loan number of each and every mortgage you have on those properties, as well as all current leases on those properties. Also, the legal description of each property may be required;
- Proof that you have insurance on your investment properties. This generally means you’ll have to produce the cover sheet from each policy, plus the names, addresses and account numbers of each policy;
- Copies all of liens and judgments against you, whether they have been satisfied or not, and the reasons why they were filed; and
- Copies of all your account statements for the last two months. This includes checking accounts, savings accounts and stock and investment accounts. Your lender will want to know that you have enough cash for a down payment and enough money in reserve to handle the loan for a certain period should you be laid off or become ill.
Once your lender has all this in hand — and maybe more — he or she will go about the business of verifying everything. Because of the vast amount of legwork now required, it should take longer than it used to examine your financials and to hear back from the people that need to weigh in.
But once all is in hand and the lender likes what it sees, it will send you a pre-approval letter saying that absent the factors mentioned above — an appraisal and a re-check of your credit — you can afford to pay a certain amount for a house of your choosing.
Typically, the approval is good for 90 days. So once you receive it, stick in your pocket and go house hunting. Good luck.
Lew Sichelman is a nationally syndicated housing and real estate columnist. He has covered the real estate beat for more than 40 years.
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