THE IMPORTANCE OF PRE-APPROVALS VS. JUST A PRE-QUALIFICATION
When I first started in the real estate business I sold loans for a broker. We represented all the major names in banking, and hundreds of other lenders whose names youâ€™ve have never heard of. Boy, what an education that was. Each major lender provides access to a loan qualification tool sometimes referred to as a Desktop Underwriter. Â
Unfortunately, all lenders qualify you by your credit score as to which criteria you fit and every loan has different minimum requirements attached to them. The Desktop Underwriting software will compare things like your loan to value, your debt to income and mortgage ratios, and so on. This software crunches the unverified information you gave to your loan officer and compares it to the underwriting guidelines for your loan. The system will indicate whether or not you are pre-approved for that loan. You do not want to stop there and start shopping just yet. Pre-qualification is not a commitment to lend you money, so it is worthless. You need to get loan approval that is only subject to a subject property (the one youâ€™re contracting to purchase) and an appraisal that supports the price you are paying. Once you have that, now you are ready to shop for a home.
In order to get a loan commitment from your lender, you will need to go through a department called underwriting. They require the borrower to submit evidence of income and assets such as bank statements, tax returns. They will also verify employment, and may require proof of citizenship. They will check your assets, so for you foreign investors, make sure your assets have been â€œdomesticatedâ€. That means you will want to wire transfer your out of country funds into a US bank. Some wires may be held up to 7 days due to homeland security. Due to this delay, you want to make sure that you execute these transfers well ahead of the shopping phase.
What you do with your credit at the loan qualification stage of the process is critical to your success. Keep in mind the lender can and often do pull another credit report prior to funding, and if your credit scores have dropped, you may no longer qualify for the rate that was underwritten and the final approval may come back with aÂ higher rate, or a disqualification. This is what some borrowers do not understand, and they think the loan officer is baiting and switching. They are not. If an issue comes up that the lender decides you do not qualify for a certain loan, the only thing you can do is go to another lender or have your loan broker do some shopping for you to find other lenders, if any, who are willing to give the rate and program they thought you qualified for. If you have good credit and know your score, the loan officer can give you an idea what he or she can offer based on what you say. Â ButÂ do not expect them to stand by their quote if and when they pull your credit your scores have dropped. Check out my post The Top 10 Credit Do's & Don'ts During the Loan Process for more information on maintain and improving your credit score.
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