Home > Mortgages > Does Your Mortgage Pre-Approval Hold Water?

Comments 1 Comment

If a lender tells you that you can be pre-approved in just a few minutes, you might want to stop and run in the other direction — fast. A real pre-approval involves much more than just a loan application and credit report.

Here’s what a traditional pre-approval includes:

  • You’ve submitted an application with a lender.
  • You’ve authorized the lender to pull your credit report.
  • You’ve provided all requested supporting documentation.
  • Lender has specifically reviewed all supporting documentation, including your tax returns and every piece of financial documentation.
  • Lender has determined you meet all credit guidelines based on the financial strength of your credit, debt, income and assets.
  • Lender has communicated to you what monies you need for closing and total mortgage payment, as well as all suitable programs for which you qualify.
  • Lender has run automated underwriting on your scenario.

Nearly all the residential loans being originated to Fannie Mae’s or Freddie Mac’s standards must pass automated underwriting through Desktop Underwriter (DU for short or Loan Prospector, LP). Each loan is carefully run through an automated underwriting system whether you’re looking for a conventional mortgage, FHA mortgage or even a jumbo mortgage. If your loan does not pass automated underwriting, it’s more than likely your loan won’t move forward.

It’s absolutely critical in the information-gathering stage — after the lender determines how much you can afford (this calculator can help you estimate that) – that they run an automated underwriting approval to make sure your loan gets the green light. Most loans do “pass” in each system, provided the lender has done the proper loan analysis and have utilized the numbers from the supporting documentation you provided.

Are You Pre-Qualified or Pre-Approved?

If there is any step in the bulletpoints above that is not completed, then you are not pre-approved. A good lender who knows what they’re doing will typically ask you a series of questions pre-application to determine whether or not you meet the credit score requirements, down payment requirements, and the debt and asset requirements. In other words, you can’t get pre-approved without getting pre-qualified first.

Oftentimes, real estate agents want you to be pre-approved before even showing you a home. A pre-qualification, on the other hand, is simply a verbal conversation with your loan professional about your financials, that’s it. It holds no water in a real estate purchase contract offer situation. However, a pre-approval letter conveys to the home seller you’ve diligently done your legwork, and more importantly you have the ability to perform as a home buyer.

How Strong Is Your Pre-Approval?

Did your lender ask you a series of questions about your credit score, credit history, income assets and monthly obligations? Did it feel like your lender was grilling you with questions about your finances? This is a good sign you have a professional in your corner. A good lender will question everything to better understand you, your finances and determine if you can qualify. Most real loan officers need at least a few hours after having the complete application, credit report and documentation to review your figures, especially if there is any of the following:

  • A foreclosure, short sale or bankruptcy in the last seven years
  • A previous loan modification of any kind in the last seven years
  • High consumer debt payments — like income-based student loans, car loans, credit cards, tax, child, tax or alimony payments
  • Gyrating income
  • 2106 un-reimbursed expenses on your tax returns
  • Any and all self-employed income
  • Investment property scenarios
  • Or anything the lender deems to be complex

Any lender or mortgage broker that offers a pre-approval letter and a quick cursory review of your financials is gambling with your money, which could end up costing you your earnest money down the road, especially if the underwriter later determines something in your financials does not jibe. Be smart and give the time the lender requests for doing a solid pre-approval and allow them to do their analysis.

Don’t Put the House Before the Finances

This is undoubtedly an “aha” moment, as the allure of real estate is far more fun and exciting than the idea of getting a mortgage. Let’s be honest — putting together tax returns, debts, pay stubs and financial documentation for most consumers is understandably not the most pleasant thing in the world to do. However, picture this: For whatever reason you’ve not gotten pre-approved yet — work, family and life got in the way. Then you find a house one Sunday afternoon that you “must have” — it’s the ideal home for your family with location, and all the other bells and whistles. Offers are due the next day Monday at noon sharp. You call a lender, or one the real estate agent recommends, and demand they pre-approve you on the spot for you to get your offer in for consideration. This is a recipe for disaster. Not only is it reckless to ask the lender to do a cursory review your financial documentation, but it also sets you up for more questions and more conditions in the underwriting process later on because the lender did not have the time to properly devote to examine your financial profile earlier on.

This is why it’s better to get your finances lined up before you even start looking at homes. That includes checking your credit reports and credit scores ahead of time, just to see where you stand (you can get your free credit scores on Credit.com). You will be glad you did — many times over — once you do find a home that is a fit for you.

More on Mortgages & Homebuying:

Image: Hemera

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Eddie J

    Just an aside….it’s the same with all the credit card offers floating around. If you get a mail piece that says you’re “pre-qualified” for a credit card, it simply means that they think your application “might” have a shot at approval. But you’re not approved until you actually apply and they review your credit. They are more commonly known as “pre-screened offers”. Conversely, a “pre-approved” credit card offer means they have already approved you, usually for a specific limit. You simply need to call them or submit a very short form with your signature.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team