The following is an extended-length guest post from Avky Inc.
By misusing these terms, lenders and real estate agents misrepresent buyers to sellers. Potential buyers may have the wrong estimation of their potential as well. All of this does tend to lead toward problems closing loans. Taking much longer than anticipated to close or not closing at all can be eliminated by understanding these two terms completely.
Prequalified Versus Preapproved Mortgages: Pre-Qualifiying A Buyer Adequately
It takes a little more than a few questions answered in a few minutes to fully pre-qualify someone for a mortgage. There has to be a tri-merge credit report, where all three major credit reports are displayed with all three credit scores. Usually, the middle score of all three is the determining score. Then the credit report has to be analyzed for derogatory items, their severity and history, as well as the amount of positive credit history.
Prequalified Versus Preapproved Mortgages: Debt To Income Ratio
Credit alone is not enough. The minimum payments showing on the report have to be added. That sum is added to the projected monthly loan payments for the level of house sought. These monthly totals are then compared to the monthly gross income, which is one’s pay before taxes and other items withdrawn. An examination of the details on a recent pay stub will be sufficient to determine this accurately. For self employed types, the adjusted gross income (AGI) of the last tax return divided by 12 can be used.
Then the monthly debt service totals are compared to the the monthly gross income, producing a ratio. This is the Debt To Income ratio, known to mortgage professionals as DTI. A DTI too high will reduce the buying potential of a borrower regardless of how good the credit is.
Remember this, sellers and seller’s agents. Don’t be mislead by a verbal prequal (mortgage lingo) or “puff letter”. Demand a breakdown of how the prequal was determined using this information as a guide. Otherwise, there could be a whole lot drama, which possibly may never get resolved, while the house is off the market.
Prequalified Versus Preapproved Mortgages: Pre-Approved Benefits
One may get something in the mail saying he or she is preapproved for a loan. How can that be without getting pre-qualified? It is a great idea for a home buyer to actually be pre-approved though. This is like having an open credit line for buying a home. It assures a quick closing, as the buyer has been fully approved by the lender. Then closing is contingent only on a sales contract and completed property issues.
The borrower has to meet all the lender document requirements, which are reviewed by lender underwriters. This is usually a time consuming procedure. A sales contract usually states that the buyer has 15 days or less to obtain a loan commitment. That often takes longer, maybe never! Meanwhile, the house is off the market, and the seller is not sure if the buyer has a loan.
Prequalified Versus Preapproved Mortgages: Credit and Income Approval
So with an actual preapproval, the buyer already has a loan commitment. Loan commitments, or credit and income home loan approvals, usually last for 90 days. That is, a deal must close in 90 days or less, and the buyer’s profile has to be the same then as it was when originally approved.
All that is needed to close is the purchase agreement, signed by all concerned, a title report, title insurance letter, and an acceptable property appraisal. Then everyone meets at the closing table. Seller or seller’s agent, if there is a claim of preapproval, insist on seeing the loan commitment letter, which should be from the lending institution. Then closing is really close.
Avky Inc is a distribution company based out of Phoenix. Avky Inc can be reached on Twitter at @avkyinc.