Financing the purchase of a home, especially for a newbie, can be a bit daunting, time-consuming and yes, confusing. Decades ago, the real estate market was ruled by the edict-
Caveat Emptor – Latin for Let the Buyer Beware
In the late 20th century, mortgage bankers began to realize the need to create a practical gizmo, the Pre-Approval that would not only help streamline the mortgage application process for borrowers, but speed-up the process for their mortgage processors.
Eighteen years into the 21st century, the once novel concept of The Pre-Approval has auspiciously become a standard of practice for borrowers while they begin their home search.
The Pre-Approval
At its most basic, a complete mortgage approval is based up three fundamental questions. When a mortgage underwriter answers these questions, they are in a position to make the credit decision to approve (or decline) a mortgage application. The first two questions include:
CAN the borrower(s) repay the mortgage balance according to the mortgage terms?
This answer, to determine a borrower’s ability to repay, is accomplished by carefully reviewing the borrower’s employment history and implied job stability. A mortgage applicant can provide W-2’s, pay-stubs, 1040’s, and asset statements as verification.
WILL the borrower(s) repay the mortgage balance according to the mortgage terms?
This answer, reflecting a borrower’s willingness, is acquired by carefully reviewing the borrower’s tri-merged credit report. With the borrower’s permission, the lender requests the credit report.
A Pre-Approval is typically issued based upon the answers to these two questions. And when issued in writing, this Pre-Approval has the ability to strengthen a buyer’s offer as it effortlessly evidences that a mortgage lender has underwritten the borrower’s credit worthiness, within a range of purchase prices.
When is the Appraisal Reviewed?
When the seller accepts the buyer’s offer, the lender who issued the Pre-Approval then orders an appraisal of the subject property. The purpose of the appraisal is to answer the third and final question:
If a borrower is unable or unwilling to repay their mortgage, what is the value of the property (the mortgage collateral), should the borrower default on the mortgage?
When an underwriter approves the property being purchased, a full-blown commitment is issued and the mortgage loan heads towards the closing department.
The Take-Away
A Pre-Approval increases the strength of an offer to buy. It speeds up the process while providing a buyer with peace of mind. It is a total Win-Win for everyone involved.
