Mortgage Pre-Approval - Personal Finance Post

What Is The Mortgage Pre-Approval Process

Do you need a mortgage pre-approval even if you know you have perfect credit, assets that substantiate your down payment and your employment history is solid? The only no answer to the above would be only if you are paying cash, and not going through a lender.

Your pre-qualification for a mortgage gets you started in the right direction, however, you must get the final phase of pre-approval, it is the stronger analysis and you are pre-approved except possibly for the property evaluation.

This of course clarifies that yes, it is always essential to get pre-approval from your prospective lender before you head out to see the Real Estate Agent.

The Real Estate Agent Will Thank You

When you speak with a Realtor, they do not know your credit, asset, or employment history, among other things. They are not a lender, and most will tell you that they do not want to have to guess your ability to obtain a mortgage.

The pre-approval saves everyone time, and effort, and possibly a denial in the end.

What A Real Estate Agent Is Hired To Do

A Realtor is there to help you find the right property after they know how much sales price/mortgage you can afford. This does not mean they are not knowledgeable about the facts of mortgage lending, but this part is not their job. They are not lending you the money. They are opting to help you find the property that will be the security for the mortgage.

Once you get your preliminary income, assets, and employment history pre-approved; it is much simpler and easier for the Real Estate Agent. Upon handing over the pre-approval disclosure that means that your credit report has been pulled, you have probably given at least one paystub, and a bank statement, if not more.

The Most Important Aspect About a Pre-Approval –

It will tell you how much house you can AFFORD and will tell the Agent that your income, credit, assets, and all applicable information is ready to go except for the property.

Preliminary approval is not -all-inclusive. However, if your documentation for income, assets, etc. is in line with what you have given the lender who does the pre-qual, your chances of a pre-approval are better.

A copy of the 1003 application for your review of questions. See the attached-

Copy of 1003 updated 2021 -2023 here

What is a Pre-Approval of The Mortgage Application Mean?

This is when the bank/lender/mortgage lender has reviewed all pertinent information. They have answered all their questions and stated that you can qualify for a specific loan amount. They have reviewed your full credit file, income/assets, downpayment funds, and closing cost has been accomplished.

Even if this occurs, the property you choose must meet lender and investor guidelines.

What Comes Next To Getting To a Pre-Approved Mortgage Loan?

As stated above, if income/employment, has not been provided, the lender will either request the applicable documentation that is warranted. **see below

Full Income Verification – if it was not completed in the Preliminary qualification –Income Calculations here…

Total income verification for what has been stated or verified with the paystub. If the lender delivers loans to Freddie Mac or Fannie Mae, the automated underwriting system will give the required documentation.
If your employer has not been fully verified, there may be a need for more answers as well. If you submit your pay stubs and there are additional deductions, they will need to be explained also. If you are using overtime, commission, tip, or bonus income, the history of receipt for this must be verified. Most sources of income require two-year evidence of receipt. If you have only been on the job for one year, you will need to follow up with documentation to meet the two-year guideline.
If a borrower is self-employed (owns more than 25% in a business or has Schedule C Income, which is identified as Sole Proprietor. Two years tax returns with all schedules and business returns if a Corporation, S-Corp, or Partnership. This depends upon other parameters in the credit file. DU/LP’s automated underwriting system will spell out this needed documentation. *In most instances, a 2-year history of self-employment is required.
Rental or prior mortgage history verified with no late payments within the past 12 months.
The sales contract and property appraisal must meet investor guidelines and be suitable for security for the loan. There are certain contingencies that cannot affect the contract. The sale contract must disclose all the normal items that will remain with the property, and cannot represent any inducements to the purchase.

Assets Documentation

Assets/funds for closing documentation verified. This verification will include bank statements, investments, 401K statements, gift documentation, or whatever source(s) you are using for the down payment and closing costs. **This can entail many questions that must be cleared.
If you have a gift for the funds to close, you will need a gift letter from an approved source, evidence of the funds available for the donor, and evidence of receipt.
Any source of funds used for closing must be fully verifiable from an acceptable source, which meets the investor guidelines, and per the automated underwriting system. *In most instances, a recently made

Sales Contract – Inducements to the contract include, but are not limited to:

Any payment made by the seller, which is above the allowable Seller Contributions, exceeds 6 percent of the purchase price (FHA). Three (3) % for Conventional loans with less than 10% down payment, 6% with 10% – 25% down payment. Investment property any amount is limited to 2% contributions from the seller.
Repair allowance
Decorating allowance
Moving costs
Paying off consumer debt
Personal property

Personal property items that are not considered inducements are those that normally remain with the property, and may need replacement a range, refrigerator, dishwasher, washer, dryer carpeting, and window treatment. There cannot be any cash allowance to the borrower for these items.

The dwelling must meet the guidelines (not all-inclusive) I have included in another article. You can find that information here and here.

With the latter documentation, a lot can come into play.

Title Insurance- What Is A Mortgage Pre-Approval

Prior to closing the closing attorney must deliver a title insurance policy that is free of all encumbrances, liens, deed restrictions, easements, encroachments, and licenses that would affect the transfer of the title to the borrower. *Will address the Preliminary Title Policy and Final Title Policy later.

Here are some things that can occur:

Those lenders who use Fannie Mae Desktop Underwriter or Freddie Mac- Loan Prospector give a pre-approval based upon the information entered into the system.
This means that the 1003 borrower application information is entered into the system. If you brought all the necessary documentation to the application then you would be safe to think it is more of a done deal, except for the property appraisal. However, the property appraisal is always after credit approval and most people do not know the entire documents needed initially.
They use the credit pulled with the underwriting system as well. This pre-approval should be called a “good” faith preliminary approval unless all documentation is in the Loan Officer’s hand upfront. This is usually not the case, we emphasize again.
DU or LP will usually name some minimal documentation needed to finalize the approval. It will call for a satisfactory property appraisal as well.
It could include additional paystubs, more than one bank statement, verification of employment, investment account, divorce decree, child support, or alimony (if applicable, and added on 1003). Just to name a few.
Note that it is up to the lender to request additional documentation that is needed for borrowers to qualify. Meaning, when certain things pop up that leaves unanswered questions, you will need to gather additional information.

Just For The Record

Plain and simple, your life history (at least of the latest 7 to 10 years +-) is part of the package.
If you have deductions on your paystub for something not listed on 1003, the documentation must be reviewed that can satisfy the criteria. If you have 2106 expenses and are on commission greater than 25%, tax returns are required and analyzed.
When there are large deposits on your bank statements, you must provide documentation to clarify and justify the deposit. If parts of those deposits are gift funds not verified, a gift letter is essential from a relative. A paper trail of those gift funds must indicate the source from the donor’s account into your account.

These are by far not the only questions that may arise from the documentation reviewed, the 1003 application answers, the credit report, or the final appraisal.

This is the overall criteria that a mortgage lender is looking to establish:

Your ability and willingness to repay the debt (based upon current and prior history)
The equity investment, your overall income, and employment stability, as well as the property, are sufficient collateral for the mortgage loan.
A risk assessment is part of the mortgage evaluation and is determined by the entire mortgage loan file.

Some Sound Advice

Take the time to listen to the application questions. Complete, answer, and always indicate anything of importance upfront. When in doubt, ask questions. The safest method to getting approved is to make sure you have covered all areas.

The mortgage process is very detailed and lengthy, and things can pop up within the borrower’s file that must be addressed. Real Estate Agents, Loan Officers, Underwriters, and Processors are all human and it is human to miss something on occasion. Of course, one must be attentive to their task to try to avoid delaying a closing or denying a loan after the preliminary credit approval.

There is no way to list all the processes of working up a mortgage application from start to finish here in one post. We have made an effort here. The processes are many, they are explicit, and they are crucial to making a loan that is right for you the borrower, and the lender.