When applying for a mortgage, there are a number of approval processes that prospective borrowers should be aware of. It is essential that future borrowers understand the information/documentation required for each mortgage approval process in addition to the level of scrutiny that will be applied with each approval process. We will discuss three approval processes in this particular blog: Pre-qualification, Pre-approval and Underwriting Approval. While pre-qualification and pre-approval both give prospective borrowers an idea of what they can afford, they are two different processes with varying levels of scrutiny. Underwriting approval is an entirely separate, rather in-depth process that determines if a borrower qualifies for loan approval. With this brief outline in mind, we can take a more in-depth look into the specifics of each approval process.
Commonly viewed as the first step in the mortgage approval process, pre-qualification is designed to provide a general picture of a borrower’s financial situation. Pre-qualification involves a loan officer and can take place over the phone or online, often times coming free of charge. Borrowers may discuss specific preferences, special considerations and needs related to their mortgage at this point as well. As a prospective borrower, you can include as much or as little information as you want on this step, although more information will grant loan officers a better idea the particular loan that you will qualify for. This financial overview is usually not based on detailed analysis or documentation of a prospective borrower’s income, assets, debt, etc. Loan officers may conduct basic ratio analysis, however, these analysis are solely based on the information prospective borrowers choose to provide to their loan officer. After finishing the pre-qualification process, your loan officer will be tasked with issuing a pre-qualification letter. Notably, pre-qualification typically does not include a credit report review as part of the qualification process, although companies may periodically offer pre-qualification with credit reviews. Again, pre-qualification is not designed to check a prospective borrower’s credit report or determine their financial ability to pay a mortgage, it simply acts as a general overview of a borrower’s finances. Pre-qualification is often required before a seller even considers a mortgage application, serving as a foundation for the other two approval processes. Relative to the pre-approval process, pre-qualification lacks the scrutiny and in-depth financial analysis that pre-approval entails. Therefore, even if you are provided with a pre-qualified loan estimate, this estimate is subject to change due to the sheer lack of information underlying a pre-qualified estimate. With this in mind, pre-qualification should not be used to submit an offer on a new home as many details are overlooked during this process and realtors are not likely to value the offer very highly.
The pre-approval process goes beyond the reach of pre-qualification and is based on financial documentation that the loan officer receives and reviews. At a minimum, the loan officer will review documentation regarding a borrower’s qualifying income, available assets for down payment and credit report to ensure that they meet the loan guidelines. Prospective borrowers will need to complete a mortgage application at this stage prior to receiving pre-approval. Other key actions undertaken by loan officers at this stage include credit history checks and down payment estimates. Ultimately, prospective borrowers will receive a specific loan amount estimation and they may also receive interest rate estimates towards the end of this process. Finally, loan officers will run prospective borrower applications through an Automated Underwriting System, providing a means of approving the mortgage. After this stage is complete, prospective borrowers will be given a pre-approval letter and conditional commitment for the loan amount. Request your preapproval today here: Get Preapproved. Theoretically, the home search can begin at this point as the borrower has knowledge of what they can obtain in financing. It is also worth noting that pre-approval letters are only valid for a certain amount of time, usually 90 days. Mortgages Unlimited’s pre-approval letters are valid for 120 days, providing a wider search window for those seeking out their ideal home. While the pre-approval process is rather in-depth, there are certain pieces of financial information up for interpretation that could be viewed differently by the underwriters compared to the loan officer’s final decision. The importance of moving to the third level of approval is highlighted here as it provides another level of scrutiny and risk assessment. With this is mind, we can discuss the third and final approval process: Underwriting approval.
Underwriting approval is the third and most thorough approval process available to prospective buyers. Loan officers will compile a prospective borrower’s financial documents which can then be given to an underwriter. The underwriter assesses risk and ensures that a borrower matches the criteria to receive a loan by reviewing the buyer’s financial documents and accuracy of such documents. Aside from conducting an additional credit report analysis, underwriters may review tax returns, W-2s, pay stubs, credit reports, income statements, employment verifications, asset statements, calculate debt-to-income ratios and other relevant financial information. See typical documents needed here: Documentation Requirements. Mortgages Unlimited provides the added benefit of having underwriters review and verify loan amounts and terms, adding another layer of review to solidify the approval process. Ultimately, underwriters will deliver one of four final decisions after thoroughly reviewing the prospective borrower’s financial documents: Denial, Suspension, Approval with Conditions or Approval. If a prospective borrower is denied approval then the underwriter will include a specific reason as to why the denial occurred and when the prospect can re-apply for approval. This is a rarity, as often the loan officer will see that denial is likely and not submit the file to underwriting. In the case of suspension, a prospective borrower often needs to provide further financial documentation/information. The prospect can then reactivate their application after providing the necessary documentation/information. Approval with conditions indicates that a prospective borrower’s application has been approved but the borrower must meet certain conditions to finalize the approval. It may be that a prospective borrower has accounts they must pay-off or bank statements they must provide, for example. Completing these conditions will lead to the conditional approval of the borrower’s application. Finally, prospective borrowers may receive an approval indicating that their application has been entirely approved with no additional conditions. A Certified Home Buyer Commitment™ will be granted at this point and the approval process is complete. Generally, underwriting approvals may speed up the approval process due to the comprehensive nature of the underwriting process. Additionally, underwriting approvals provide a greater level of certainty to Realtors that the borrower will gain final approval on their mortgage. If time permits, an offer should always be submitted with an underwriting approval letter and not a pre-qualification or pre-approval letter.
Bringing it Together
As stated at the onset of this blog, prospective borrowers should be aware of the various approval processes and their nuances before moving forward with a mortgage application. The more in-depth the approval process, the greater the likelihood is that your application will be approved. For example, Mortgages Unlimited offers an underwriting approval process in which your income, assets, employment and loan program are reviewed are verified. Additionally, your loan will be personally reviewed by a Mortgages Unlimited underwriter and the buyer will receive a Certified Home Buyer Commitment™. In providing these services, we hope to provide an in-depth and transparent path to approval that reduces your anxieties and maximizes your chance of approval. For more information the approval processes available through Mortgages Unlimited, submit your preapproval request today – www.furlongteam.com/apply!