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Pre-Approval vs. Pre-Qualification
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Pre-Qualification vs. Pre-Approval

 

When someone is pre-qualified this typically mean they have told a loan officer how much income is coming in, how much money is in the bank, and the state of their credit.  Based on the information a loan officer can calculate the approximate price range for that scenario.  However, just because they are pre-qualified for a certain amount does not mean that is the actual amount a person would be able to purchase.

 

Getting pre-approved is the best way to know what you can purchase.  By providing the items needed to get pre-approved you can rest assured there will not be any surprises later in your transaction.

 

How to get Pre-Approved

 

The following items are needed for pre-approval:

  • Past two years W2’s
  • Past two pay stubs
  • Past two months bank statements
  • Past two years taxes
  • Past two statements on any retirement accounts or other financial accounts
  • Copy of award letter if receiving social security or a pension
  • For a veteran wishing to do a VA loan please provide the DD214 and certificate of eligibility
  • Explanation of any late payments or collections in the past two years
  • Bankruptcy discharge papers if a bankruptcy occurred in the past seven years
  • Court documents for alimony or child support if applicable, and proof of receipt

 

Once these items are collected, the loan officer will have a complete file to turn in to an Underwriter.

 

Benefits of Pre-Approval

 

The person who approves your loan is the Underwriter.  Because the Underwriter has final say on your loan, it is important to get your documents to this person as soon as possible.  When you initially call and tell the loan officer your scenario there is fairly good idea of what you could buy based on that information.  The next step will be to pull a credit report.

 

The credit report will be pulled to make sure your credit is acceptable to the loan program you are applying for.  Seventy percent of the time a credit report has inaccurate information that could hurt your chances of approval.  Because of this strong possibility it is very important to get your credit pulled quickly.  As long as there is time to fix the inaccurate information before your closing then there is not much concern.  However, there can be surprises that you were unaware of such as:

 

  • You co-signed and that person has been late, thus reflecting a late payment on your report.
  • Your medical insurance did not cover the full cost of a visit and there is  a $50 medical collection on your report.
  • The last time you moved, the cable company did not account for picking up your cable box.  Now they are showing a $400 collection (this happens a lot).

 

Another benefit to pre-approval is clarification of employment.  If you tell your loan officer that you make $30,000 annually, but not that $5,000 of that is from overtime and $2,000 was from a bonus there could be an issue.  Typically there has to be a two year history in order to count overtime and bonuses.  The same is true for commissions.  However, even if there is not a two year history the amount you have received can be divided over a two year period and we can often use that average.

 

Lets pretend you pick up the phone and tell the loan officer, “I make $50,000 a year and I only have a $100 monthly credit card debt”.  The loan officer is likely to tell you that you are pre-qualified for $185,000 home.   However, what if that $50,000 is from commission and not salary and you have only been on the job for a year?  Now we have a problem because there is not a two year history of making $50,000.  So maybe the Underwriter allows us to divide the $50,000 over two years and now we have $25,000 in income.  Now you are pre-qualified for a home priced around $100,000.  Big difference from what you were originally pre-qualified for.

 

Based on the fact that a pre-qualification leaves too much room for error it is important to get pre-approved before looking for a home.  Pre-approval will analyze your documents and assure you that you are looking at what your budget will truly allow.  Do not take chances with disappointment and frustration, only base your home search off of your pre-approval.