How Soon Should I Start the Process? Based on my experience, there's no downside to getting started earlier rather than later. As soon as you
have serious thoughts about buying your first home, or a new home, you should reach out to a Licensed Mortgage Professional.
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| Source: U.S.Census Bureau |
What's a Pre-Qualification?
It's the initial step in the mortgage process. Based on your overall financial picture, a lender will
give you an idea of a mortgage amount you are likely to qualify for. Most pre-qualifications are based on information
you provide a Mortgage Originator. Though some sources suggest a pre-qualification does not take into account your credit
report, today's pre-qualification generally does. I have also read sources that suggest a pre-qualified buyer isn't
as strong as a pre-approved buyer. There is some truth to that statement, but only because the real estate community
has been conditioned to believe it's true.
What Should I Expect?
A proper pre-qualification should begin with a few general questions about you, your goals,
and your needs. From there, your personal finances are discussed. Knowing how you're paid, how much you make, who
you owe and for how long, and what you've saved for downpayment will help. With this information and your credit
report, various mortgage options can be determined and discussed.
What's a Pre-Approval?
It's the next step in the pre-qualification/pre-approval process. In recent years the line between the
two got a bit fuzzy. So let's examine. Before pre-approvals became vogue the industry standard was the
pre-qualification. Knowledgeable, well trained Loan Officers knew how to "interrogate" a homebuyer and knew
underwriting guidelines like the back of their hands. A pre-qualification was a very dependable tool. During the
later 80's interest rates dropped significantly. The mortgage industry exploded with new business and new people.
Competition was fierce and training, well, there wasn't time or money for it. As a result, the initial step in the home
buying process broke down. As the fallout of pre-qualified homebuyers skyrocketed realtors immediately questioned
the reliability of pre-qualifications. The industry was simply short on knowledgeable veterans to support the needs
of the real estate community. So, mortgage companies came up with an ingenious solution. They offered and sold
a new and improved pre-qualification process: the Pre-Approval. The pre-approval was a more involved process.
A complete application was taken and supporting documents were exchanged, absent a purchase agreement. Clients
were charged an application fee, which was non-refundable (most sources omit that fact). A credit report was required.
The information was then sent to a staff underwriter. Homebuyers were provided a written conditional loan commitment.
Some lenders even allowed the homebuyer to lock their interest rate during this step. And, the process did restore credibility
to the pre-qualification process. Here's the reality check: the pre-approval has always been about marketing, and ways
to attract and retain customers. To support that statement I offer one question to consider. Why were there so
many different variations of pre-approvals a homebuyer could choose between?
Is a Pre-Approval Better?
Yes, a pre-approval would be better if it was true to its origins. But that changed during the 90's.
Technology became a cost effective substitute to the mortgage underwriter, and pre-approvals ceased being reviewed by an underwriter.
Instead, Loan Originator's run financial information through an Automated Underwriting System and receive a feedback message.
Here's the wrinkle, Automated Systems cannot validate the data it measures conforms to underwriting guidelines. Do you
see history repeating itself?
Over the Past 10 Years Have Pre-Approvals Been Reliable? Prior to 2007, pre-approvals were nearly flawless. Before leaping to any conclusions, stop and consider
that rubber stamped approvals dominated the market. We "old-timers" referred to that period as the "Fog-a-Mirror"
era. Anyone that wanted a home simply showed up, fogged the mirror to prove they were alive, and walked out with the
money they wanted. Lending was so loose that a pre-anything was fundamentally unnecessary and a meaningless exercise.
But lenders went through the motions anyhow. Since 2007, that story has noticeably changed. The need to know
underwriting guidelines and documentation standards re-emerged. With that re-emergence the Loan Originator's lack of
training was again out in the open. And, the fallout rate on pre-approvals spiked as dramatically as pre-qualifications
did during late 80's and early 90's.
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HUD's Settlement Cost Booklet (1.26MB pdf), (8/17/2010)
24 CFR 3500.6(c)&(d): "[no]
changes to, deletions from, or additions to the special information booklet currently prescribed by the Secretary shall be
made..."
This brochure was prepared by the following agencies:
HUD, DOJ, Treasury, FDIC, FHFB*, Federal Reserve, FTC, NCUA, OFHEO*, OCC, OTS.
* In 2008, FHFB and OFHEO were superseded by the Federal Housing Finance
Agency (FHFA)
When you close, will you actually receive the terms you were promised and applied
for? Lock-ins are a way to ensure that what was promised is what you get.
Equal Credit Opportunity: Understanding Your Rights Under the Law (PDF)
Under the Equal Credit Opportunity Act (EOCA, Reg. B), it is illegal to discriminate
in any credit transaction: on the basis of race, color, national origin, religion, sex, marital status, or age; because income
is from public assistance; or because a right has been exercised under the Consumer Credit Protection Act.
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