SANTA ANA, CA--(Marketwired - Oct 11, 2013) - We all have heard from the media, the Internet and our neighbors that home mortgage loans are tough to get today. Rates remain low by historic norms, but it doesn't matter much if borrowers can't qualify. So, what can you do to make the process easier?
"Many borrowers essentially sail through the application process. Because they do their homework and plan ahead, they get prequalified," said Ray Brousseau, Executive Vice President with Carrington Mortgage Services, a lender active in more than 40 states. "Not only is the application process easier, but a qualified borrower is more attractive to home sellers, meaning that borrowers can get a marketplace advantage by going through the prequalification process."
What are such things as prequalifications and preapprovals for a mortgage, and how do they work?
Let's start with some basics: Borrowers can get either a mortgage "prequalification" or a mortgage "preapproval" -- two terms that sound similar, but may be quite different.
Prequalification vs. Preapproval
Typically, with a prequalification, the lender asks for a general statement of income, assets and debts. On the basis of the information provided, the lender then estimates how much you can borrow at today's rates. This is a ballpark figure, subject to further verification and further documentation. The lender then provides a letter showing the amount of financing you may be able to receive.
With a preapproval, the lender will ask for documentation such as tax returns, bank statements, retirement account information, W-2s and other paperwork. The lender may pull your credit report and verify your information. From such documentation, the lender can provide a letter showing with good accuracy the loan amount you qualify for and for which program you are eligible.
"With a prequalification, the lender now has information in hand that can be used to speed the loan application process," said Brousseau. "If there is missing information, the lender can explain what is needed and why. As well, the borrower can look for inaccurate credit report information and start the correction process before applying for a loan.
When looking at choosing between a prequalification and preapproval, the borrower should be aware of two central points:
First, some good definitions of the terms "prequalification" and "preapproval" come from the Consumer Financial Protection Bureau (CFPB). It says that "prequalification is a lender's estimate of how much you could be eligible to borrow based on information you supply, while "preapproval usually means that the lender is ready to make you a mortgage loan based on the information and documentation you provided at the time you requested a preapproval."
However, when it comes to specifics, "prequalification" and "preapproval" may mean different things to different lenders. No less important, the terms are sometimes used interchangeably. For this reason, borrowers should always ask lenders what they mean when using either word.
Second, the letter received from the lender -- whether for a prequalification or a preapproval -- is not a final loan commitment. It's a conditional or provisional loan commitment, because important information is not available until later in the buying process. For instance:
- The borrower may not have picked out a property. Without a property, the lender has no way to determine such things as the borrower's loan-to-value ratio, whether the home qualifies for an FHA loan or if the sale qualifies for a jumbo mortgage.
- A sale agreement between the buyer and seller has not been reached. Such an agreement may contain provisions that materially impact a loan application. For instance, are there any "seller contributions" -- credits to the borrower that most loan programs allow? Is the appraised value at least equal to the sale price?
- Because the property is security for the loan, the lender must be certain that the home has good, marketable and insurable title.
- The data provided to the lender may not be final. If a borrower opens new credit accounts or takes on additional debt before closing, it's possible that the application could fall through -- reason enough to avoid such pitfalls when applying for a mortgage. Lenders will want at least one credit check at the time of application, and another just before closing; however, some lenders get credit updates on a daily basis.
"The lender would love to approve the loan up-front, but the lending system has tons of requirements outside the borrower's control," said Brousseau. "The property's price, the appraised value, title questions and similar items cannot be established until there is a final sale agreement."
Another Bargaining Chip
For home buyers, a prequalification letter from a lender can be a powerful bargaining chip, especially in rebounding markets where multiple offers for a single home have become more commonplace.
"A seller wants to make sure that a transaction goes through," says Carrington's Brousseau. "A letter from a lender attesting to a buyer's financial capacity can help erase seller uncertainty and doubts."
For more information regarding prequalifications and preapprovals visit our website -- CarringtonHomeLoans.com -- to either request more information or locate a Carrington mortgage loan officer near you.