Not All Pre-Approvals Are the Same – Part 1

When you put your offer on a house, realtors and their clients selling the home consider “the strength” of your offer. Your pre-approval letter is one of the most important pieces. But, did you know that not all pre-approvals are the same? Here are the main types of pre-approvals

Pre-Qualification

This is the very first step in the entire mortgage process. At this point in the process, we’re just talking. I haven’t ran your credit, taken a full loan application, or received an “automated approval” from either Fannie Mae or Freddie Mac. In this particular situation, you are most likely “just thinking” about buying a home.

Related: Am I Ready to Buy?

This type of pre-approval is normally used for people to get a basic understanding of their situation and what they can afford. During this process, I would go over your Debt to Income Ratio, how much house you can afford, and what things to consider during the process. It’s more of a consultation than a form that says, “We’re pre-approved.”

Most realtors won’t accept a pre-qualification, which is why I don’t usually put this type of pre-approval in writing. Realtors, almost always, want to see at least a Standard Pre-Approval.

Standard Pre-Approval

This is the next step in the mortgage process. This is where I’d take a full loan application. I’d ask you questions about your job, income, assets, length of residency, etc. I’d pull your credit and review it with you. We’d talk about down payment and loan options.

To complete a standard pre-approval, I have to run your file through our automated pre-approval system. This is the minimum that most realtors want to see on a pre-approval. They want to know your “conditionally pre-approved” through my system because they know that means you’re a truly qualified buyer.

The term “conditionally pre-approved” means that you’re pre-approved with conditions. This doesn’t mean you can’t get denied. Instead, it means you have to meet certain conditions to be approved. Most often, these conditions are:

-         Providing documentation to support your income, job history, taxes, and assets

-         Home appraisal needs to meet the purchase price (usually)

-         Full underwriter approval

Fully Underwritten Pre-Approval

This is a much more thorough process of pre-approval. Usually, this isn’t done until you have an accepted offer on a home. However, in some situations, I can ask our underwriting team to fully underwrite your file before you’ve found a house. This means I’ll ask you for a lot of documentation so the underwriters can fully verify that you are approved.

There is one small catch here. Even fully underwritten pre-approvals can get denied. Why? There’s a few reasons:

-         The home you want to buy doesn’t appraise for what it’s supposed to.

-         Your job / income changes from the time of underwriting to the time of closing. (Yes, we have to verify)

-         Your credit changes. You needed a new car because yours broke down so you got a new loan. (Please don’t do this!!)

-         Your assets change. Maybe you decided to buy furniture and depleted your savings accounts. (Bad idea! Wait until after you close!)

Related: The 10 Commandments of Buying a Home

Not only are they not all the same, there are some very specific things that are included on pre-approval letters that make realtors think “Wow. This is a strong pre-approval!”