Sunday, January 2, 2011

Homebuying: Understanding the Mortgage Loan Pre-Approval Process

Well it's 2011 and we are in the beginning of a new year and of an upswing in the real estate market. Home prices are beginning to stabilize and loan products are becoming a little more buyer friendly. There are still some challenges in the market but things are definitely looking up.

So it is time for you to start thinking about buying your first home or your next home. The weather will be breaking in a few months and more homes will be coming on the market and there will be some good buys to take advantage of. The question is, what is the first step for a home buyer? Well, there are basically two ways to get started. If you currently have a good relationship with a mortgage lender, then your first step should be to get Pre-Approved. If you do not have a relationship with a lender, then I suggest that you contact and meet with a Realtor first, so that your financial situation can be previewed and a good referral can be made.

Another task is actually choosing the Realtor that will be your guide through the process. Your Realtor should be someone that you trust, not only with your confidential information but also with your confidence in the information and guidance that they provide. Choosing the right Realtor is essential to holding the entire buying process together.

Once you have connected with your lender, the pre-approval process has begun. This process involves your loan officer requesting some essential documents: One month of paycheck stubs, Two months of bank statements, last two years of tax returns are the basic documents needed for most buyers. Your credit reports will also be reviewed. Theses documents and information provide the necessary information to the lender to decide 2 important things; what kind of loan you qualify for AND how much house can you afford. These two things can be determined by a couple of different processes done by the lender. It is critical to understand which process the lender is going to use and to request the right one so that your transaction will go as smooth as possible.

The first and least thorough process is called Pre-Qualification. Pre-Qualification simply involves the loan officer having a conversation with a potential buyer and getting the above listed information, verbally from the buyer. This information is not confirmed, validated or documented and can come into question at a later date by the underwriter, who is the final decision maker for the loan. The Pre-Qualification process typically does not require documentation or review of the information for a buyer to be considered "Pre-Qualified".

The other process is called Pre-Approval, which actually has two different levels. The basic level of Pre-Approval is called a "Desktop Pre-Approval". This process usually involves the loan officer actually gathering the necessary documents from the buyer. The loan officer then takes the information from the documents and inputs that information into an Underwriting Software program on their desktop computer. The software program then processes the information and makes a determination of the buyer's credentials. This determination is definitely more reliable and solid than a Pre-Qualification, because there is actual documentation of the buyer's information. The problem is the software program is not the final decision maker for the loan. When the loan has undergone a Desktop Pre-Approval process, the underwriter typically does not see any of the documentation until after the buyer has a property under contract, has already paid for and undergone a home inspection and appraisal. The underwriter, then gets the complete file for review and can then question the credentials of the buyer and even not approve the loan based on the information provided at the very beginning of the loan process.

The next level of Pre-Approval and the most thorough process is an "Underwritten Pre-Approval". This is the most thorough because it involves the actual collection of all documentation from the buyer and a complete review and analysis of the credentials by the underwriter, who is the final decision maker for the loan. This is the process that you want your lender to perform at the very beginning of the loan process. It allows you to answer all questions, collect and provide any additional documents needed before you begin to look at homes and spend any money on the buying process. You also will be able to close your transaction much faster because half of the Approval process has been completed. Once you find the home you love and you and your agent have negotiated a good price, the only thing required by the lender is an appraisal to ensure the home is sufficient collateral for the loan.

One thing to understand as a buyer, an "Underwritten Pre-Approval" takes more time than the other processes. It may take from 3-7 business days, depending on the time of the month and the current level of active transactions going to the underwriter. The trap you don't want to fall into is having one lender saying they can get you Pre-Approved in 24 hours and it not be a 'solid' pre-approval and you have problems late in the process after you money invested in the transaction.

Be careful and be patient with the process and it will pay off in the end. Understand how the process works and ask plenty of questions so that you do thoroughly understand. Your loan officer and your Realtor should be able to explain this process in an easy to understand manner. Although you really don't need them to because you have read this post!!

Feel free to contact me and leave comments with any questions or comments that you may have....