MISCELLANEOUS COMMENTS ABOUT THE FINANCIAL CRISIS, REAL ESTATE, MORTGAGES AND OTHER RAMBLINGS



Wednesday, February 16, 2011

Pre-Qual, Pre-Approval, Conditional Approval - What's the Difference ?

As long as I have been in the mortgage business (about 8 years now), there has always been confusion by borrowers (and some loan officers) about the difference between a loan Pre-Qualification and loan Pre-Approval.

Not Even Close...
A Pre-Qual, or Pre-qualification can almost be considered a task as simple as someone looking at a credit report and saying "yes, they have a credit report with decent scores, therefore, they are pre-qualified for a mortgage loan !". It isn't that simple, but it is very, very close. A pre-qual has no real standing, and is virtually worthless. There are so many nuances with a REAL approval for a mortgage loan that a pre-qual simply misses. If a broker or lender tells you they will "pre-qual you for a mortgage", first ask them what they mean by "pre-qual". If they then describe to you they will basically only review your credit report, tell them, "never mind". A pre-qual is simply a wast of everyone's time...

Better, But Still Not There Yet...
A Pre-Approval is a little better. Why ? Well, a pre-approval contains more information about the borrower. Generally, a pre-approval involves URAR 1003 loan application. A lender, or broker will actually ask the borrower questions based on the 1003. Then, they just fill in the blanks. It is very similar (it is the same document the loan officer will use for loan submission to underwriting, but usually does not have verified information) to the actual loan application.

Once the broker has the information, they will then submit the information to either Fannie Mae's DO/DU (Desktop Originator/Desktop Underwriting) or to Freddie Mac's LP (Loan Prospector) Loan Approval engines. A broker or lender can use DO/DU or LP to pre-approve a FHA, VA, or Conventional loan for a borrower. It is very powerful, and it is a simple, quick way to see if the borrower fits into the scope and parameters of the loan program they are seeking. DO/DU and LP are also used as guidelines by underwriters as to what the borrower will need to provide to the underwriter in order to receive final loan approval. We will talk more about that in a minute. But you still are not there yet...


You Are Getting Close...
A Conditional Approval is actually that - Your loan is approved based on the conditions that have been set by the underwriting. The 1003 has been completed by the loan officer with the information contained on the application verified with the borrower's documentation. The loan officer has looked at paystubs, W2's, bank statements and verified work history, rental history, and various other items and tasks required for the loan to be approved. A conditional approval is much better than a pre-qual and a pre-approval, but it definitely the riskiest area to be in, and the scariest. You are fully immersed in the loan process now. The chips are stacked - you have drawn a line in the sand...This is your position and you will stand behind it, 100%. You are all in...

There are so many things that can go wrong now, and you are totally exposed, unlike when you are in the pre-qual/pre-approval stages. You can pay for an inspection and the foundation is bad. You can pay for a appraisal and the value is not there. Or if it is at first, the lender will ask for a field review and drop the appraised value $60,000 (welcome to today's real estate market !), which will absolutely kill your deal. Or their is a cloud on the title of the property. There are so many things that can go wrong here.

I do not mean to scare anyone. Most real estate transactions go through okay. Very few have things that happen that stop the transaction cold in it's tracks. But I will tell you this - There Will Always Be Something to Deal With in a Real Estate Transaction, I can promise you...


This is What You Want...
Final Approval. Nirvana. You have made it. This is what it is all about. You have met all of the conditions required to close your mortgage loan transaction, and everything has checked out and fits the parameters set by the DO/LP Approval and underwriting. The underwriter now has no choice - they issue Final Approval, and your loan is Clear to Close. The underwriter then forwards your loan to the lender's closing dept., and then you schedule your closing. The bumpy ride is over, and you have won...

I have been through this process a hundred times, and everyone of them is a unique experience, never to be forgotten...

So, the tip of the day is this - Ask for a "Pre-Approval", always. It will start you off on the right track, and if you do not measure up right now, at least you will know what you may need to do in order to get your final approval in the future...

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