You called your bank, discussed that you would like to purchase a home instead of continuing to pay rent and would like to get pre-approved. You may or may not schedule a meeting; maybe you weren’t even asked if you would like to schedule a personal meeting. They ask about your employment, income and complete a loan application then run your credit. They maybe discuss a few loan options with you. Then they tell you that they have put you through the “automated underwriting system” (AUS) and your pre-approved. Hooray! Time to go look at houses!
Now you go out and find the house, put in your offer, your offer gets accepted and now you’re under contract, now what? Your file gets sent to underwriting and here is where there is a true separation from pre-approval and pre-qualification and if you were really pre-approved. Let me give you two scenarios:
First scenario, you completed a loan application and had your credit ran, stated your income, then they ran you through an AUS system (automated underwriting system) and said you’re pre-approved, gave you a lender letter and send you on your way to look at home (as previously mentioned above).
Second scenario, you completed the loan application, they ran your credit, you sent them your pay stubs (one month’s earnings), two months most recent bank statements from checking/savings and possibly retirement or stock accounts, your last two years W2’s and tax returns (all pages). Then they gave you a pre-approval AFTER discussing loan options, showing you what purchasing a home would look like including discussing your desired monthly mortgage payment, what funds would be expected for down payment and closing costs. After knowing what you are comfortable with and having a firm grasp of what purchase price you should be staying and looking at in order to maintain your desired monthly mortgage payment. Then they sent you on your way to look at homes with a lender letter.
Now, if you had the first scenario, YOU ARE NOT PRE-APPROVED! You have been set up for possible denial on a loan and the risky part is that you are already under contract. There is a high probability you may not close and/or could lose your earnest money. Maybe you can close but you find out that you will need more funds to close then you initially expected or were never advised nor discussed what would be expected and required for funds to close and now you don’t know if you have enough money for down payment or closing costs. You soon realize you may need down payment assistance or other options to help with funds for closing. But you find out that your current lender does not have those options available. What do you do? You have to find a new lender and you have limited time to find one because you are under contract and against deadlines.
The unfortunate thing is that the first scenario is happening way too often. We receive many calls regarding this exact situation or very similar. Usually the first place we search for a mortgage is our bank. I’m not saying that this is not a good place to start; I’m just saying to be cautious because these are the calls we are getting and where they are receiving these supposed “pre-approvals”.
If you are a first time home buyer, most likely you don’t know where to begin and don’t necessarily know what you should be expected so your initially instinct may be to trust your bank and this is the most common place homebuyers start.
My advice is that no matter whom you choose to work with on getting pre-approved for a home mortgage, you should first do your homework. Start with asking friends and family for a referral to a lender. Then make sure to research them online, check out their website, blogs and most importantly reviews (Google, Yelp and Facebook). Then when you have chosen a lender you need to know they should request all your financial documents along with completing a preliminary loan application and running your credit. This is the process of getting pre-approved. Keep in mind that a lenders pre-approval is not the final approval, only an underwriter can provide a final approval, which happens once you are under contract.
An experienced and licensed mortgage professional will do their best to “pre-approve” you and won’t provide a lender letter and send you out looking for a house unless they are confident that you can close. If they don’t ask for all the financial documents upfront and state that these are not needed until you go under contact, then again please be cautious!
Prepare yourself, do your research, and I also recommend taking a homebuyer education course. They are free and extremely helpful.
If you would like more information, have questions or would like to get pre-approved, please contact us!