The mortgage industry is full of insider buzz words that seem to have been created to beguile all but the most seasoned insiders, in fact this topic trips up even veterans of 20 years and more; Pre-qualification and Pre-approval.
This due largely because when these two terms originated many years ago it was simple, or at least the mortgage process was simpler. It was simpler in terms of compliance and technology. Originally, Pre-qualification was just based upon some simple math and information used to determine the loan amount that the applicant(s) could qualify for using income and debts. Pre-approval was a more in-depth process of analyzing credit, assets and income by an underwriter and providing a decision as to whether or not a loan could be approved. Simple right?
Then came automation and something called Automated Underwriting where a computer using an algorithm arrived at a credit decision. Pre-approvals were simple and blazingly fast, but there was one small point that eventually became a big one, the data that was used in making the decision was not always accurate, so sometimes the Pre-approval was meaningless. During the time this was happening, it didn’t make much difference because it was at about that time when lending guidelines became, shall we say, beyond liberal and we all know now what that led to.
After the melt down in the mortgage industry, new laws designed to protect the consumer were adopted and the industry began to return to the more traditional method of Pre-approving a borrower. Until another set of new laws came into play, which depended on the technology solutions and interpretations of these new laws by the lenders themselves. Many of the new laws are vague and guidance from regulatory bodies is either not provided nor clear. As result many lenders have become reluctant to provide Pre-approvals and opted to beef up their Pre-qualification standards where this would now include credit analysis and verification of income and assets prior to issuance.
While this could all change down the line, the best course is to be sure that your lender is doing a thorough review of your financial picture by asking what their process is to qualify you for a mortgage.
Happy House hunting!
By Tim Hattan