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Before the Financial Crisis began in late 2007 just about anybody over 18 years of age could easily apply for and in most cases get a mortgage loan to buy and/or refinance Real property anywhere in the USA. Often income and asset documentation either was not required or very little documentation was needed to support the loan application. In addition borrowers credit worthiness (good credit with supporting credit scores) didn’t matter much if any to most lenders.
WOW, times have definitely changed! Today, 3.5 years later, the pendulum has swung completely to the other side of the spectrum. Lenders today demand that borrowers have strong credit, they must document their source of income, and prove they have the funds to close escrow. Today, we are truly in a “FULL DOCUMENTATION ENVIRONMENT”. This means simply that anything stated on a loan application (referred to often as a 1003) can and most likely will be required to be substantiated by supporting documentation. This is a very different world from the one of the Real Estate boom days, and it is truly a 180 degree shift in the Mortgage Lending Environment.

So what are the differences between a Pre-Qualification and a Pre-Approval?   Let’s start by defining in simple terms a Pre-Qualification. A prospective buyer/borrower picks up the phone, or emails a loan officer, or maybe goes through an online site and they are asked a series of questions like what is your monthly income, how much monthly recurring debt payments do you have (car loans, credit card payments, etc.), how much money do you have in the bank and of that what kind of down payment will you make? After a very quick analysis of the information given by the borrower the loan officer or the computer model tells you that you would qualify for a mortgage of X, at a monthly payment of Y, at an approximate interest rate of Z. You are probably beginning to see that a Pre-Qualification is simply a guesstimate based off of information stated and not supported by any documentation what so ever.

Pre-Qualifications are  good only to give a very loose idea of what a borrower may be able to do but they definitely DO NOT GIVE ANYONE  A SOLID UNDERSTANDING OF WHAT KIND OF PURCHASE POWER AND LOAN A BORROWER TRULY QUALIFIES FOR!

On the other hand a true Pre-Approval is very similar to a completely underwritten Final Approval with the exception that no property is identified and no appraisal of the property has been performed. A true Pre-Approval is most often considered a Credit and Income Approval. In this case the Loan Officer will require from the borrower/buyer a full loan application, signed disclosures allowing the lender to run credit, and income documentation to support monthly income.  Also, the lender will require bank, retirement, and investment account statements for the most recent two months or most recent quarter.  Once all documentation is received, then a complete analysis of the application and supporting documentation will be performed. Often the Pre-Approval can take several days to complete depending on the complexity of the applicant. However, once the Pre-Approval has been issued, the buyer/borrower and Realtor have confidence that the buyer/borrower truly has the capacity and the capability to obtain financing, and close escrow so long as the appraisal (the physical inspection of the subject property) does not raise issues related to the condition or value of the property.

Below is a typical needs list of the kind of documentation lenders require upfront when performing Pre-Approvals.

  1. 2008 AND 2009 federal tax returns including all schedules
  2. 2008, 2009, and 2010 w2’s where applicable
  3. social security award letters and pension advice statements where applicable
  4. most recent 30 days paystubs for all borrowers where applicable
  5. most recent two months bank, investment, and retirement account statements (including all pages even if a page is blank
  6. clear legible copies of drivers licenses or other acceptable forms of identification
  7. completed loan application (1003)
If you are interested in getting Pre-Approved for a home loan please feel free to contact us anytime!
the MADSEN|SHAW group
Michael Madsen ext. 209
Ron Shaw ext. 208
Brian Toohey ext. 207

Wine Country Real Estate