Different Types of Approvals
Which puts you in the best position when buying your home?
One of the least understood parts of the home buying process is getting a loan approval. Rarely do home buyers understand what an approval letter actually means. Lenders typically don't explain every detail to their clients until you have an accepted offer.
There are three different types of approval letters that you can get as a home buyer. We're going to go over what they are, and what they actually mean.
The three types of approvals are...
- Fully Underwritten Approval Letter
Let's go over each of these in detail so you can choose which one is best for you in your current situation.
** It's also important to mention that these are in order from weakest to strongest **
A pre-qualification is a letter that shows that the borrower hasn't taken the time to get approved for a loan. To get a pre-qualification letter from a lender, all you need to do is have a phone conversation. No applications, no credit check, no documentation.
This is a guess, at best, at what a borrower can qualify for.
What situations make sense for a pre-qualification?
If you're in the early stages of house hunting and you want to get an idea of what you can afford, getting pre-qualified is a great idea. But, when you get to the point where you've decided you're going to make a buy, you need to at least get pre-approved.
If you're writing offers with a pre-qualification, you're putting yourself at a disadvantage. Most Agents will look at the letter and feel that you're not serious about buying.
This is an unnecessary red flag when negotiating an offer. If you were to get your offer accepted, you'd have to immediately take all the steps to get fully approved anyway.
The gold standard has always been a pre-approval letter. The process to receive a pre-approval is simple. You contact a lender and fill out a loan application, run your credit and provide some documentation on your income/assets.
Next, the loan officer will review your 'file' and see what they think they can approve you for.
Then they'll issue you a pre-approval. Simple, but misleading. A pre-approval letter does not mean that you're approved for the loan. The loan officer is not the person who decides whether your loan is approved or not. That is the job of the underwriter.
At this point, a lender will issue you a pre-approval letter and tell you that you can go shopping for a home and to let them know when you get your offer accepted. Once you have an accepted offer, then that loan officer will do the rest of their job.
There is likely a lot more paperwork that they'll ask for before they can even send the file to underwriting. This takes time and brings a level of uncertainty to a deal.
While a pre-approval is better than a pre-qualification, it does not mean that you're approved for the loan. It also doesn't put you in the best position for submitting offers; especially in a competitive market.
Fully Underwritten Approval
If you're wanting to get the best deal possible, you're going to want to go this route. Getting your loan fully underwritten up front is going to give you a huge advantage. Once your loan is fully underwritten, it allows you to write offers that are almost as good as cash. Everyone knows that cash is king in a negotiation.
What does it mean to be fully underwritten? A fully underwritten approval needs all your documentation to be collected and sent to an underwriter. The underwriter has gone through the file and requested any extra documents and approves the borrower for the loan.
Most lenders do not even offer this because it requires them to do a lot of up front work with no guarantee that you'll do business with them.
Giving the ability to write offers as good as cash to borrowers is huge when negotiating deals. It also gives certainty to the seller that your loan will close if they accept your offer.
In the end, you have to choose what makes the most sense for you, right now. If you're in the very early stages of shopping, a pre-qualification is fine.
Once you are ready to start writing offers, you should get a fully underwritten approval.
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Return to the House Hunt December 10, 2023
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