When you create an offer on a house, the Seller is going to ask you to prove that your mortgage will close on time. All you need is a pre-qualification, right? Nope. You need a pre-approval. A pre-underwritten mortgage is even better!
What’s the difference?
A pre-qualification is not fully documented. It means you have shown a lender what you earn and what you owe. The lender has given you a ballpark estimate of what you can borrow. No credit score was requested from the credit agencies.
So many things can go wrong with a simple pre-qualification. Here are some common ones:
- You counted your bonuses as income. They aren’t reliable income, so they don’t count.
- You forgot to tell them about the alimony or other payments you owe.
- You have a lower credit rating than you did three months ago. You told the lender your previous rating.
A pre-qualification is not enough.
- Seller’s agents know the difference; they are likely to tell the seller that your offer is less attractive than another buyer who has a pre-approval.
- You could be disappointed because you thought you could afford a home that you can’t buy.
A pre-approval is documentation that a borrower’s income, debt, and assets have been verified. They are approved for the amount on the pre-approval letter. A pre-approval is what most buyers get in order to be competitive in the current market. Sellers want to know that there is no missing paperwork that could foul-up the mortgage.
Pre-underwriting is even better. Some mortgage lenders will complete a pre-approval and then have their underwriter approve the mortgage. This leaves much less chance that there is a technical problem with the documentation. There are a few more steps to closing, but underwriting is out of the way.
A Seller will be more confident about your mortgage if it is pre-underwritten. In some markets, many lenders will pre-underwrite on request. Ask your agent which recommended lenders on their list provide that service.
What does an underwriter do?
Your mortgage originator (sometimes called a loan officer) wants your loan to go through. Sometimes, they miss a detail that the underwriter objects to. Sometimes there are mistakes. Sometimes, there are financial changes that need to be further documented.
An underwriter is responsible for the final approval of a mortgage loan. This person will review the documentation and make sure it makes sense. They are looking for signs that you are borrowing from other sources, which affects how much you can borrow from them. They are looking for signs that you are spending more than normal, so that you don’t have enough reserve when you close. They will want documentation of any changes since you first gave your paperwork to your mortgage originator, if they are unsure. They may ask for more details on unusual financial situations that were approved by your mortgage originator.