STEP 1 – DON’T GET PRE-QUALIFIED FOR YOUR LOAN! LET ME EXPLAIN…
July 29th, 2008 categories: Buyer Strategies, Mortgage & Finance
[NOTE: Rob Martinson continues his series on getting the home mortgage process right. His first and second installments are in our Mortgage & Finance archive.]
So you want to buy a house in Northern Virginia do you?
For years I have been getting phone calls from borrowers telling me they are looking to get pre-qualified for a loan. My response? “No you don’t.” (Confused silence usually ensues).
Pre-qualification is one of the greatest pitfalls in the lending industry. A pre-qualification holds about as much value as a $3 bill. It might appear to have all the proper markings and insignia, and it might even tell you how much you are “pre-qualified” for, but in the end, it will not be honored by any bank, whether printed on letterhead or not. Call it a technicality, but what you are looking for is a pre-approval letter. That little word change makes all the difference. It is what turns a simple sheet of paper into a guarantee. If a bank issues a pre-approval, it means that as a borrower, you are 100% approved. I say as a borrower because there will still be a few outstanding conditions regarding the property itself. At that point though, unless you alter something on your credit, change jobs or income, or lose your ass(ets) in Vegas, the bank is obligated to give you financing. So how do you get there?
You will need to supply your loan officer with a wealth of information. It is always a good idea to start with verbal information. How much do you make, how much money do you have, and how much do you plan on spending on both down payment and monthly payments? With this your loan officer can paint you a picture of how much you can afford. (Note: this is where I could give you a pre-qualification letter. See why it doesn’t carry any weight?) If you are comfortable with what your loan officer lays out for you, that is when you need to take it up a notch.
To get approved, you will need to go through underwriting (u/w, as it is abbreviated). Underwriters have the final say on whether you qualify for the money you have requested or not. They will look at your W-2’s, tax returns (mostly for self-employed borrowers), paystubs, and asset statements, among other things. After reviewing your file, underwriters have three choices: yes, no, and not quite. The “not quite” response will come in the form of a counter-offer: the underwriter likes your file, but doesn’t agree that you are qualified for as much as you requested, so they provide you a lower amount you are approved for.
Assuming you are approved through the underwriting process, you are now on the path to homeownership. Your loan officer should prepare a pre-approval letter for you on official bank letterhead. The letter should stipulate a number of things, but the only outstanding things that would keep you from acquiring the loan should relate to the property itself, i.e., a satisfactory appraisal to verify value. With letter in hand, let your Realtor® know you are ready to start shopping.
As we move towards step number two, Selecting The Right Home For Your Loan, I will leave you with some things that should be included in a strong pre-approval letter:
• Purchaser (your name here)* is approved for the financing specified above
• A written application for the financing has been made
• Income, asset, and liability documentation on purchaser (your name here) have been received
• Purchaser’s (your name here) credit has been reviewed
• The application has been reviewed and meets underwriter and investor guidelines
• (Your bank here) requires a satisfactory appraisal and clear title
This post by Robert Martinson. You can contact Robert at Robert.a.martinson@bankofamerica.com]
* The “your” is in italics, because again, though you are approved, it doesn’t mean the bank will loan on any property. The property, too, must pass certain parameters.
