The mortgage pre-approval process
Many lenders have a different take on what the pre-approval process should include, or when they feel comfortable issuing a pre-approval letter. Some lenders are willing to just discuss your information over the phone and issue a pre-approval letter, which some may think is great since it’s so easy, but there is quite a bit more to getting pre-approved then just having a verbal conversation about how things should look. Most mortgage applicants also don’t know the difference between being “pre-qualified” and being “pre-approved”. “Pre-qualified”, this is an ambiguous term that is used to provide the homebuyer a false sense of security to engage in a mortgage transaction without the loan officer doing their proper due diligence. It’s a cop-out for the explanation that should have been: “Based on the verbal information you sound good, however before you make an offer we need to verify everything we went over, that will include a credit check, reviewing income & asset documentation, and if needed, even verifying employment directly with your employer.” In my opinion you should never be providing that initial paperwork after an offer is made, it should always be done prior to your offer.
The steps should actually go like:
1. Meet with a loan officer (this can be face to face or over the phone, I do not recommend solely done via email) 2. Loan officer will explain the process to the homebuyer, what will be done at each milestone, when out of pocket costs should be expected 3. Loan officer and homebuyer will verbally discuss the homebuyers situation, including financials, credit and any special circumstances the homebuyer is in (like getting gift funds, starting a new job in a new area, past employment, etc.) 4. Homebuyer will complete a loan application (this is recommended to do with the loan officer “live”, not just simply filling out the application and sending it to the loan officer) and credit is checked 5. Homebuyer will provide loan officer documents the loan officer needs (paycheck stubs, W-2’s, tax returns, bank statements, letters of explanation) 6. Loan officer reviews documents and contacts employers for any further required verification (for example averaging overtime, commissions, etc. and clarifying start dates if employment has been less than 2 years), including running the loan through the automated underwriting system (be it FHA, VA or conventional). If the loan is “borderline” then the loan officer should contact underwriting to get clarification on how any unique aspects of the loan will be handled, and may even go so far as to send the entire loan file to underwriting to have a conditional underwriting approval issued for a “TBD” property address. 7. Loan officer issues a pre-approval letter letting the homebuyer know they are pre-approved for a certain amount 8. Homebuyer makes an offer and it’s accepted 9. Homebuyer or their real estate agent provides loan officer copy of contract terms 10. Loan officer re-runs actual terms/conditions through automated underwriting again 11. Loan officer/processing staff generates the loan application/disclosures for the homebuyer to sign/initial/date/return to the loan officer 12. Loan is sent to underwriting (sometimes the title report needs to come in, sometimes the appraisal needs to come in – YMMV depending on the lender – the title report is ordered immediately, the appraisal can be ordered once you receive the application/disclosures) 13. Underwriting reviews all documents and usually additional documents (called “conditions”) are required, such as evidence of homeowners insurance, small items on the appraisal corrected (if needed), amongst a laundry list of possibilities (brace yourself for the underwriter to ask for small items so it doesn’t come as a surprise, sometimes it isn’t much at all, sometimes it can be a bit) 14. Conditions are sent in to underwriter and reviewed, final loan approval is issued 15. Loan officer informs homebuyer when documents can be prepared and delivered to title/escrow officer or closing attorney (“closing agent” is the generic term) for the closing (usually no more than 2 days from final approval) 16. Closing agent prepares the final settlement statement (called a HUD-1) for lender approval, lender approves, homebuyer goes in to sign final loan documents in front of a notary 17. Depending on the state you are buying in, it may fund/record the day you sign or there could be a few day period after you sign before it funds & records (rule of thumb is if you are east of the Rocky Mountains it’s the same day, west of the Rocky Mountains usually there is a couple day delay – but vice versa can certainly be arranged ahead of time).
See how in the above process a majority of the processing/verifications were taken care of prior to the homebuyer going into escrow on the home, and not before? It cuts down on the “your paperwork didn’t come over in the correct format and this is delaying your closing date” type of excuses. That is the way to properly handle a purchase transaction in my opinion.
If you want to know what steps your lender is taking to insure your pre-approval is solid, just ask, they shouldn’t mind telling you, and it’ll give you both a chance to feel more comfortable with the mortgage transaction process. Remember, this is like school, there are no stupid questions, and at no point in the process should your loan officer make you feel like you are wasting their time by asking questions.