Many hopeful homeowners wait with bated breath to obtain a final mortgage approval so they can close on their loans and move into their new homes. But before they’re approved for their mortgages, they must first get past the pre-approval step. The lender uses the pre-approval step to qualify a borrower and make sure all loan requirements are met before granting a final approval.
The difference between being "pre-approved" and actually "approved" for a mortgage is like waiting for the red light to turn green; that is, you’re waiting for a lender to give the all-clear signal to go ahead and schedule the mortgage closing.
Applying for a Mortgage
Even before an applicant reaches the pre-approval step toward qualifying for a mortgage, she must first apply for the loan. This application gives a lender the basic information that it needs to begin processing the loan and move toward the first goal of pre-approval. An applicant’s income and debts, among other financial data, help the lender choose a loan program (or programs) for which the new borrower qualifies. Not all types of mortgages fit all types of borrowers, so the application process helps to pair each borrower with the best mortgage fit.
Obtaining Mortgage Pre-Approval
A lender – or the lender’s underwriter – performs a preliminary analysis of a mortgage application by crunching some numbers. The lender assesses the applicant’s financial health by reviewing factors such as the debt-to-income (DTI) relationship, a stable work history and the borrower’s credit score. And the lender doesn’t simply take the data submitted on a borrower’s application at face value; all the numbers must match supporting documents, including the applicant’s tax forms, pay stubs and W-2s. But once everything is documented, and all the numbers are in alignment with loan parameters, a lender issues a pre-approval.
Receiving Conditional Pre-Approval
There’s typically a step between a pre-approval and a final approval – the conditional approval. A conditional loan approval means that an applicant must meet certain “conditions” before the pre-approval is cleared for final approval. A conditional approval essentially is tying up the loose ends of a pre-approval and making sure that all the loan requirements are satisfied.
Meeting Mortgage Pre-Approval Conditions
A lender may provide a conditional qualification letter to the mortgage applicant that details all the remaining items a borrower must address before the lender can grant final mortgage approval. This task list may include producing more paperwork, such as an additional year’s tax return, or paying off (or paying down) a debt to bring the DTI within loan guidelines. And because mortgage approvals are contingent on an appraisal (and often a home inspection, too), a conditional approval may simply be waiting for the appraiser's report.
The source of funds for a borrower’s down payment and closing costs must be documented, typically by a bank statement. Optimally, a lender wants to see that the funds are the borrower’s own cash reserves. If a borrower’s bank statement shows a recent large deposit, this may be a red flag.
Although a borrower can use a cash gift as a source of his down payment, the underwriter might question whether the borrower will be able to make monthly mortgage payments if someone else had to gift his down payment. And, at a minimum, the underwriter will request that the borrower produce a gift letter from the person who produced the funds – just to make sure that the funds are indeed a gift and not a loan.
Receiving Final Mortgage Approval
Once all the i’s are dotted and the t’s crossed, a successful pre-approval reaches the goal of final approval. The borrower is cleared to receive the mortgage loan and is now able to schedule a closing with his attorney and coordinate the funds transfer from the lender to the seller.
But if anything tilts the balance to change a borrower’s financial state between final approval and closing, the loan could be rescinded. For example, if the applicant buys a car after his final approval but before the mortgage closes, this additional debt burden could throw his DTI out of acceptable guidelines for the loan.
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