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Is Your Loan Approval Worth The Paper Its Written On
Arguably, the most crucial part of the home buying process is making sure your finances are in order before you start writing offers. Not only does this mean that you should have a clear understanding of what you can afford, but you'll also need to make sure your loan pre-approval is ironclad.
Unfortunately, some would-be home buyers are writing offers with pre-approval letters that are worth as much as the paper they're written on. They're in such a rush to start looking at homes, that they haven't taken the time to be properly vetted for a home loan.
The most common reason why homes fall out of escrow is due to issues with the buyers finances. Accordingly, a skilled agent will thoroughly scrutinize the qualifications of anyone submitting an offer on their listing. As you can imagine, it would reflect poorly on them if they encouraged their client to accept an offer from a buyer only to find out 30 days later that the buyer can't close because they can't get a loan.
That being said, if you're considering buying a home, it's extremely important to know about the three types of loan approval so you can position yourself as the best buyer for that property.
Pre-qualification usually involves a 15-20 minute phone call with a loan officer who will ask you for your basic financial information over the phone such as monthly or annual income and monthly debt payments. Based on that information, the lender will issue a pre-qualification certificate approving you up to a certain amount.
Honestly, this certificate is worth about as much as the paper it’s written on; none of that information has been verified by the lender, so it can hardly be considered a firm commitment to lend. This is a very high risk offer in the eyes of a seller.
Pre-approval is Issued when a lender submits your written income, employment verifications, debts, and explanations for any issues with your credit score through desktop underwriting (DU), or a computer algorithm weighing your risk as a borrower. Based on that information, you will be issued a loan amount with a pre-approval certificate, usually with the disclaimer “This is not to be considered actual loan approval” because your file has not been troubleshooted by a live, human underwriter.
This step is a little bit better than pre-qualification, but still not a firm commitment to lend.
Conditional Loan Approval or Approval Subject To Address -
The best form of pre-approval is conditional loan approval, or approval subject to address. This occurs when a live, human underwriter has troubleshooted your file after DU. The lender will then issue a firm commitment to lend as long as certain conditions are met, such as a satisfactory appraisal, and final verification of employment.
At this stage, you're shopping with a cashier's check using the bank's money. If you're comfortable doing so, you may also considering waiving your loan contingency, which would even allow you to compete directly with cash buyers.
After the market crashed in 2007/2008, lending requirements are much more strict. Banks are requiring more documentation and scrutinizing borrowers in more detail than ever before. At some point in the process, all necessary information will need to be provided to the bank prior to final approval and funding.
By handling all of those requirements upfront, you'll put yourself in a much stronger position over other home buyers who have not yet gone through that level of scrutiny. And because of that, you'll have more leverage at the negotiating table, which could save you tens of thousands of dollars off the overall cost of the home.
Andrew Ramirez was born and raised in Orange County, living in Irvine and Tustin as a child before moving to Costa Mesa in 2001. He lived there for twelve years before marrying his high school sweethe....