That's because without knowing if the buyer's current
Credit have been thoroughly evaluated, that's all
they may be worth.
® think that a PreApproval goes a step or two further than a Pre-Qualification.
Until we know what actually goes into either one, both are just
vague terms that carry more assumed weight than they should.
To start our discussion, it's important to know the difference between :
- Pre-Approval and/or Pre-Qualification
- Full Mortgage Application
- Mortgage Commitment
Pre-Qualifications are preliminary
estimates of mortgage affordability based on information a buyer has
provided to the lender.
They are neither offers to lend, nor agreements to borrow.
By definition and function, they are prepared
before buyers submit an offer on a specific property.
For our discussion today, I am using either of the two terms to indicate the
same initial estimate of affordability.
Some Mortgage Originators provide PAs and PQs before fully
evaluating a buyer/borrower's true financial picture. This is often seen with PreApprovals generated from online lender sites.
As you'll see shortly, a thorough and
dependable PreApproval contains most of the elements needed to turn into a supported Application when a purchase contract is accepted.
According to the
CFPB (Consumer Financial Protection Bureau),
the Federal Agency that oversees all things mortgage-related, borrowers have made loan
Application when they have provided just the following 6 pieces of information:
1 - Name(s)
2 - Income
3 - Social Security number (to obtain credit report)
4 - Property value (estimate, not yet an appraisal)
5 - Loan amount sought
6 - Specific property address
none of these items necessarily has to be
verified in order for someone to have made a legal application and receive mandatory initial disclosures.
The property address is usually what turns a loan
inquiry into a loan
Application, causing the borrower to receive CFPB-required disclosures before continuing.
Therefore, a buyer can comply with the purchase contract's Financing Contingency requirement to make timely loan
application,yet not have provided
any supporting documentation.
Are you starting to see the flaws in the system?
Before sending an Application to
lenders must still ask for and receive
followup information to support anything that's in the Application. This can include tax returns, bank statements, employment verifications, letters of explanation, and anything else needed to verify what's been submitted.
At this point, further progress depends entirely on how quickly the buyers submit their documents.
And remember that the contract's Financing Contingency
is constantly ticking while all this is going on.
Only after the full Application is submitted to Underwriting and it looks good for final Approval, can a
Mortgage Commitment be made by the lender. At Underwriting, buyer, property, and contract details are checked for compliance with specific loan program guidelines.
A Mortgage Commitment (or denial) is the only document that provides buyers with enough information to decide whether to
continue on toward closing, or fall back on the Financing Contingency and
terminate the deal. Remember that the contract specifies the date on which the contingency expires, ending those buyer options.
Even then, there are still
conditions to be met before closing. It is almost impossible for a Mortgage Commitment not to have conditions, which may include requests such as:
- Proof of homeowners insurance
- Most recent bank statement showing money for closing costs
- Financial statements from the property's HOA
- Pre-closing refreshed credit report showing no new debts
- Evidence of clear title and lenders title insurance
- Letters of explanation for items questioned by Underwriting
Not meeting all conditions will prevent the buyer from receiving final Approval and a
Clear-To-Close (the last step before closing and funding).
If the buyer's Loan Originator didn't
think ahead to possible closing conditions (based on a buyer's true financial picture) when doing a PQ or PA, the deal could still fall apart after everyone has spent 5 or 6 weeks waiting for closing.