You can thank the Dodd-Frank Consumer Protection Act for depriving the term “pre-qualified” of relevance to borrowers in search of financing their home purchase.
That’s not really a bad thing, but it does place a greater burden on borrowers to prove themselves worthy of a mortgage before they present an offer to sellers.
All pre-qualification means is that a purchaser “could” qualify to receive a loan, but pre-approval means the buyer will likely be approved for a mortgage provided all terms of a loan commitment are fulfilled.
(Whether the building itself will qualify and whether the lender continues to be in the mortgage business at the time of closing are other matters altogether than could stall or explode a transaction.)
As Guardian Mortgage loan officer Jeannie Smith explains in a HousingWire.com post, the pre-approval process involves efforts of the homebuyer to complete an application and provide verification documents for income, assets, employment history and credit.
The writer points out that underwriters demand evidence of borrowers’ acceptability before issuing a pre-approval. They want to review the following things:
- Current income verification and historical income from two years of consistent past employment;
- Proof of cash needed to close by assessing the source of the down payment, closing costs and cash reserves after closing;
- Buyer’s credit history with specific attention to the middle credit score, any derogatory accounts such as collections and disputed account, and any public records related to foreclosure, bankruptcy and judgments.
The good news for the buyer is that this is information that they’ll have to submit anyway, and it speeds up everything that follows an accepted offer. It may also give risk-takers the confidence to go to contract without contingencies related to financing.
For the seller, of course, it always is comforting to know that the chance of a contract falling apart because the buyer ultimately fails to obtain a mortgage is rather slim.
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Licensed Associate Real Estate Broker
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022