Pre-Approval Letter Basics

you-are-pre-approvedGetting a mortgage qualification letter prior to looking for a new home with an agent is an essential first step in the home buying process.

Besides providing the home buyer with an idea of their monthly payments, down payment requirements and loan program terms, a Pre-Approval Letter gives the seller and agents involved a better sense of security and confidence that the purchase contract will close on time.

There is a big difference between a Pre-Approval Letter and a Mortgage Approval Conditions List.

The Pre-Approval Letter is generally issued by a loan officer after credit has been pulled, income and assets questions have been addressed and some of the other initial borrower documents have been previewed. The Pre-Approval Letter is basically a loan officer’s written communication that the borrower fits within a particular loan program’s guidelines.

The Mortgage Approval Conditions List is slightly more detailed, especially since it is usually issued by the underwriter after an entire loan package has been submitted.

Even though questions about gaps in employment, discrepancies on tax returns, bank statement red flags, and other qualifying related details should be addressed before issuing a Pre-Approval Letter, the final Mortgage Approval Conditions List is where all of those conditions will come up. In addition to borrower related conditions, there are inspection clarifications, purchase contract updates and appraised value debates that may show up on this list. This will also list prior to doc and funding conditions so that all parties involved can have an idea of the timeline of when things are due.

What’s Included In A Pre-Qual Letter?

Getting a Pre-Approval Letter for a new home purchase is mainly to let everyone involved in the transaction know what type of mortgage money the buyer is approved to borrow from the lender.

The Pre-Approval Letter is based on loan program guidelines pertaining to a borrower’s DTI, LTV, Credit, Property Type and Residence Status.

A complete Pre-Approval Letter should let the borrower know the exact terms of the loan amount, down payment requirements and monthly payment, including principal, interest, taxes, insurance and any additional mortgage insurance premiums.

One of the most important items to remember when looking into financing is that there is sometimes a difference in the amount a borrower can qualify for vs what’s in their budget for a comfortable and responsible monthly payment.

7 Items to Look For On a Pre-Approval Letter

  • Loan Amount – Base loan amount and possibly gross loan amount (FHA, VA, USDA)
  • Status Date and Expiration Date – Most Pre-Approval Letters are good 90 days from when credit report is run
  • Mortgage Type – FHA, VA, USDA, Conventional, Jumbo
  • Term – 40, 30, 20 or 15 year fixed, ARM (Adjustable Rate Mortgage); if ARM, 1, 3, 5, 7 or 10 year initial fixed period; Interest Only
  • Occupancy – Owner Occupied, Secondary Residence, Investment
  • Contact Info – Lender’s Name and Address
  • Conditions – Document and Funding requirements prior to Approval

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