The ‘‘pre’’ stuff verifies two critical elements in credit approval, which are the ability and the willingness to repay a mortgage. Ability and willingness both go hand in hand. While you can make enough money to be able to afford to pay back a loan, if you don’t have the willingness to do so then it won’t work. And of course there are certainly a lot of people out there that may have the willingness to pay someone back, they just don’t have enough money to do so.
By verifying the income, verifying the available assets to close on a house, and reviewing the credit report, these two initial hurdles are overcome. It’s no big deal, but documenting your prequalification really is your very first step. But let’s examine the process a little more in detail.
First, here’s what doesn’t happen. Loan applications aren’t sent to some loan committee for review. Loan committees went out with leisure suits. In those days, yes, that’s how it happened. Potential borrowers would apply for a mortgage and extol their financial virtues; a loan committee, usually meeting once per week, would later discuss the positives and negatives of the applications. A host of old men in black suits, smoking cigars and saying things like ‘‘harrumph,’’ would eventually approve or disapprove the loan request.
Today, your loan application is approved or not approved at the very beginning of the process before it ever gets to an underwriter (the person who physically approves your loan). This process is now mostly automated, which is different, but it’s also different because everything is approved first before anything is ever verified. It’s different from the old days. It used to be document and verify absolutely everything before any approval whatsoever. You could go three to four weeks without really knowing if you’re approved. Today, your loan is approved first, then verified later.
Those of you who have applied for a home loan within the past ten years or so will recognize this next drill.
First, you gathered all your documentation—bank statements, tax returns, and paycheck stubs—whatever you could think of. Then you trotted down to your local mortgage company, bank, or savings and loan and met with a loan officer. You completed the loan application with a loan officer who then detailed the types of documentation needed. Your credit report was also pulled and reviewed. Your debt ratios were calculated to make certain you weren’t borrowing more than you, in the lender’s eyes, could handle.
If there were any credit problems, say a late payment on a car last year, the loan officer would ask for an ‘‘explanation letter.’’ The credit report would show the problem, whether a pattern or an isolated instance. The explanation letter was a secondary requirement that had to be in the file. Many times the letter simply said, ‘‘I forget why it was late.’’ And it would still be okay. It didn’t have to convince anyone or be necessarily plausible, it just had to be there. You’d also have to address any other discrepancies, such as length of time at current job or a gap of employment. Didn’t work because you broke your leg? Provide some medical bills to prove it. Sudden deposits of money in the account? Prove where you got it to make sure you didn’t borrow the money from somewhere else, affecting your debt ratios or perhaps hiding a prior lien on the property.
And that’s just from your standpoint. At the same time an appraisal of the home you’re considering buying would be ordered along with some initial title work. Then a bevy of folks would start mailing stuff to you, explaining this and declaring that, and using words you’ve never heard of. Then about three weeks later, after all of the required documentation has been gathered, and only then, your complete application would be sent to a loan underwriter for approval. It’s been nearly a month and the mortgage company still hasn’t looked at your complete application.
This process simply means this: Verify first, approve last.
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