May 17th, 2017 6:08 AM by Jackie A. Graves, President
Home purchasers sometimes get into trouble because they are not
clued into the sequence of steps involved in financing their purchase. These
are qualification, pre-approval, approval, lock and appraisal.
(or “pre-qualification” as it is often called) is an opinion that your income,
assets and current debts qualify you for a loan of some specified amount. The
opinion may come from a lender, a Realtor, or it may be your own based on your
use of an affordability calculator. Whatever the source, the opinion does not
take your credit into account, and no one is committed by it.
used to be that Realtors did a lot of qualifications, often
back-of-the-envelope affairs, so that they would not waste time looking for
houses in a price range the buyer could not afford. Increasingly, they ask
borrowers to become pre-approved by a lender because it is more reliable than a
qualification, and lenders are willing to provide it free of charge as a way of
stimulating business. Home sellers have also learned to ask potential buyers
for a pre-approval.
is a conditional commitment by a lender to make a loan prior to the
identification of a specific property. On a pre-approval, unlike a
qualification, the lender verifies the information you provide and checks your
credit. A pre-approval will stipulate a loan amount or monthly payment, but not
necessarily the loan type or the price.
lender’s commitment under a pre-approval is always conditional, but rarely are
the conditions spelled out. Pre-approvals don’t have expiration dates, but some
considerable time may elapse before the borrower receiving a pre-approval comes
back to convert it into an approval. During that period, things can happen that
cause the lender to back off. For example, the borrower’s credit deteriorates,
or she loses her job. No one can reasonably expect a lender to approve a loan
in those circumstances.
clear-cut are the impacts of adverse market changes, such as the tightening of
underwriting requirements that occurred last year, on outstanding pre-approvals.
If a lender has pre-approved a loan and the market changes to the point where
the same loan would not now be approvable, will the lender honor its
obligation? I fear that in most if not all cases, the answer is “no”.
Fortunately, abrupt changes in underwriting rules occur very infrequently.
recommend that purchasers get pre-approved as a way of establishing their bona
fides to home sellers and Realtors. Only one pre-approval is needed, and it
does not commit them to the issuing lender. It is only fair, however, to
include that lender among the loan providers you shop when you have a contract
to purchase and need a loan. But bear in mind that if you switch to B after
being pre-approved by A, you must now be approved by B.
home purchasers who want to know their prospects for loan approval before they
begin a house search can use the loan approval calculator on this site. The
calculator uses underwriting requirements posted by participating lenders,
including credit score requirements, but the user must enter her own credit
score, which might differ a little from the score obtained by a lender.
is a commitment by a lender to make a loan. Unlike a pre-approval, a specific
property (along with its appraised value) is identified, and the loan details
are spelled out. These include the type and purpose of loan, down payment, and
type of documentation. It will also include an interest rate, even though a
rate is not firmly established until it is locked. The presumption underlying
an approval is that the probability of closure is high – much higher than with
not 100%, however, because borrowers sometimes drop out, and sometimes one or
more of the conditions that accompany the approval are not met. Approval
letters contain “Prior to Doc” and “Prior to Funding” conditions, which are
checklists of nitty-gritty details that must be completed before the final
documents are drawn, and before funds are disbursed. Sometimes, one of these
details derails the train.
is a commitment by the lender to a specified price – rate and points.
Ordinarily, lenders lock at the borrower’s request, and view the borrower as
being committed as well, though they don’t always communicate this very well, or
at all. Since locking imposes a cost on lenders, some of them charge a
nonrefundable fee which may be credited back to the borrower at closing.
recommend that when your loan is approved, you lock the price the same day,
because that is when you know the price. Holding off because you expect market
interest rates to decline, is a bad gamble. You don’t know how to forecast
future interest rates any more than I do. Besides, unless you can monitor your
rate on the lender’s web site, the market rate when you finally lock will be
what the lender says it is.
appraisal is an opinion regarding how much a property is worth, based mainly on
recent transactions of similar properties in the same market area, with
allowance for differences between the properties. While the quality of
appraisals has deteriorated in recent years for reasons I have discussed in
previous articles, they remain critical in any purchase transaction that
requires a mortgage. Mortgage lenders base the maximum amount they will lend on
any property on the lower of purchase price or appraisal. This means that if
the appraisal comes in below the price, either the seller must reduce the price
to the appraised value, or the borrower must make a larger down payment.
Usually the seller gives way, but in a sellers’ market in which prices have
been rising the buyer may be forced to put up more cash.
By Jack Guttentag - To view the original article click here