Decoding Preapproval Letters
Prequalification, Preapproval, Pre-underwrite? Wait, what?! If your head is spinning with all of the preapproval terms online, it’s no wonder as different lenders call different levels of preapprovals by different names.
More important than what it’s called is how much information the lender verified before issuing you a preapproval letter. The more information is verified, the stronger the preapproval and the less risk of surprises when you’re in contract on your new home. (Below we will refer to the various types of letters generically as “preapprovals”.)
Here’s what you need to know:
- The Gold Standard: TBD or pre-underwritten approval. If you start your home loan application at least 2-3 weeks before you make an offer, you have time to obtain the highest level of preapproval available – a TBD or pre-underwritten approval. The process essentially requires you to complete an application, authorize a three-bureau hard credit pull, and submit all documents required by your lender for underwriting.
Your lender will verify your employment, assets and income and your file will be reviewed in full by an underwriter, just as if you were in contract. If everything looks good, your lender will issue you a preapproval letter that contains a commitment to lend. A commitment to lend tells you and the seller that as long as your financial picture remains the same (no new cars or early retirement please), you are fully qualified for a home loan and the property just needs to pass the appraisal requirements. A commitment to lend reduces the risk to both you and the seller of your loan not closing, which makes your offer more attractive.
- A Solid Preapproval: If you don’t have time to go through the pre-underwrite process, the next best thing is a preapproval issued after your loan officer has verified your income and assets -utilizing your complete application, three-bureau hard credit pull and documents you provide – and run your file through automated underwriting. This preapproval can generally be completed same day or within 24-48 hours depending on how quickly you provide the requested documentation. While not as strong as a TBD or pre-underwrite, this type of preapproval should catch any red flags and mismatches between information entered on the application and lender guidelines, thereby giving you confidence to move forward with an offer.
- Solely Computer Generated – Run! You complete an online application and moments later the computer spits out a letter clearing you to go out there and by a home. If you are anything but a salary only W2 employee purchasing a home within conforming loan limits, this preapproval isn’t worth the virtual paper it’s written on. Here’s why:
- If you are hourly, receive RSUs, bonus, or commission, the lender isn’t going to calculate your income the same way you receive it, and your application is likely stating income higher than allowed so you may not actually qualify for the loan amount listed in the letter.
- If the application pulled a one-bureau soft credit pull, instead of a three-bureau hard pull and the scores from the other two bureaus are lower, you may not possess the minimum FICO score needed to qualify.
- To err is human and it is very, very common to make mistakes while completing an online application. Any error could affect whether and for how high of a loan amount you qualify.
The bottom line: Pre-underwrite if possible. If a pre-underwrite is not available, then make sure your lender reviews your application and supporting documents in full, so you don’t have any surprises while you’re in contract on your new dream home.