Knowing the difference between a pre-qualification, a pre-approval letter, and a true pre-approval will help you position your self for a complication free closing.  

Whether you are purchasing or refinancing a home, a complete pre-approval is more valuable today than it has probably ever been. Yet most large banks and lenders do not do take the time to do true pre-approval.

The pre-approval process is significantly more complete than pre-qualification. In today’s environment, most lenders are still taking the term pre-approval lightly, and pre-approval letters are being given away easier than they should be.  This can give you a false sense of confidence and set you up for complications as you approach closing.  Lets review each type. 

Pre-Qualification - For pre-qualification, the loan officer asks you a few questions pulls your credit report with typically only one credit bureau and provides you with a pre-qualification letter. Not many experienced sellers accept these letters anymore.  It todays economic environment this is not enough information to accurately predict if you will qualify for the loan.

Pre-Approval Letter - Most lenders today provide you with a pre-approval letter. In many instances, the loan officer pulls your credit (sometimes with only one credit bureau which is very limiting), reviews a few documents, asks you a few questions and provides you with a pre-approval letter. This is the most dangerous type because the borrower believes that at this point they are fully approved; however, that is rarely true.  This false sense of confidence can leave you extending your closing date, or even losing the property when you find out closer to closing that you are not approved.

True Pre-Approval – This is what HomeStart Capital does every single time before providing a pre – approval letter. This process includes all the steps of a full approval, except for the appraisal and title search. A HomeStart Capital pre-approval can put you in a better negotiating position, similar to a cash buyer.
Here is what is required for a true HomeStart Capital pre-approval. Your loan officer pre-underwrites your loan at application to reduce the risk of a denial during the process.

1. Full review of your credit report (from all 3 credit bureaus Transunion, Experian, &Equifax)
2. Full signed tax returns (Every schedule is necessary, as well as W-2s) if self employed your loan officer should request both personal and corporate tax returns. If there is a loss on a business or a rental property, this loss should be subtracted from the personal reported income.
3. Full two months of bank statements (Every single page should be reviewed). Any transfer or deposit other than your direct deposit paychecks from your employer should be fully documented and explained.
4. Full latest month of pay-stubs. Your loan officer should be able to use your current base income. However, any bonuses or overtime has to be consistent and usually have a minimum history of two years.
5. Current Mortgage statement, HUD-1 closing statement & Promissory note If a refinance, your loan officer should ensure that your previous loans at any given point have not been a “cash out” or a home equity loan. In Texas, (per the state’s constitution) once a home equity loan has been placed on title, all future loans will be considered a home equity loan, even if you do not pull cash out or pay off debt with the home’s equity on future loans. There is one way you can avoid this rule: if the home equity loan was a separate home equity loan, the separate home equity loan could be left in place and the first lien could be refinanced separately thus avoiding its classification as a Home Equity loan per Texas law. Call 713 275 2785 if you would like to learn more. If you are unsure about your current loan status, your loan officer should be able to make a determination with your latest HUD-1 settlement statement or closing statement.

In todays economic environment a standard pre-qualification and pre-approval may leave you with a false sense of confidence, and have you falling short at closing. I highly recommended you find a reputable mortgage broker, meet face to face and have them perform a true pre-approval.  This will give you the best chance of closing on your property.  At HomeStart Capital, we meet 100% of our clients face to face and always do a true pre-approval.   This has allowed us to have a 100% closing ratio on our pre-approvals.