Not All Preapprovals Are Equal - 5 Signs That You're Preapproved for a Mortgage
Getting preapproved for a mortgage gives you a leg up on the homebuying competition – especially in a hot real estate market with limited inventory. But not all preapprovals are equal. In fact, what many lenders position as a preapproval is actually a pre-qualification letter, which serves a different purpose.
We’re here to set the record straight so you know how to spot the differences between a preapproval and a pre-qualification and the purpose each serves.
Getting pre-qualified is typically the first step in the mortgage process. It is a great way to create an initial budget for your potential home purchase. It also allows you to get a feel for whether a lender is the right match for your needs.
To start the process, you’ll provide the lender with your basic details, such as income and assets, through a web application or a phone call. The pre-qualification is calculated based on the stated information you provide – no documentation is required. However, if the lender uses an automated underwriting system as part of their pre-qualification process, a credit check is required.
When you get preapproved, the lender does a more in-depth review of your financial situation. In a hot real estate market, having a preapproval can make you more attractive to sellers. It also helps you move through the loan process quickly once you’ve made an offer on a house.
You start the process by supplying all required income, assets, and credit documentation. The lender then has an underwriter complete a full review of the documentation to evaluate your credit risk and confirm that you meet the requirements for the loan. The underwriter will provide a preapproval letter that includes a specific purchase price, loan amount, and rate for which you’re likely to be approved. This indicates you’ve been preapproved based on the information reviewed and you can begin home shopping.
Preapprovals are typically valid for a set time, such as 90 days. Keep a close eye on the date – if you’re still shopping when the deadline rolls around, you’ll want to repeat the preapproval process to have accurate numbers on hand.
Here’s what to look for when you’re working with a lender to get preapproved.
1. Time From Request to Response
If you receive an immediate response, it’s highly unlikely that you’re fully preapproved. Even if an automated underwriting system is in place, there’s a human verification point that needs to happen before a preapproval letter goes out.
2. Credit Pull
Lenders need to evaluate your credit risk to determine how much money they’ll lend and at what rate. Your credit report is one of the sources that’s used to determine the risk. As a result, preapprovals will always require the lender to pull your credit independently, and it will record as a “hard” credit inquiry on your credit report.
The credit check will require you to provide your Social Security number (in the U.S.) because that’s the unique identifier that’s used by the major credit bureaus to catalog your credit activity. If you weren’t asked to provide your SSN, then a credit report likely wasn’t pulled.
Keep in mind there are some lenders who will run a credit check with pre-qualification, so this alone isn’t a definitive sign of preapproval.
3. You Provided Documentation
Pay attention to what documentation is requested prior to receiving a preapproval letter. At the very least, the lender should have requested documents to confirm:
Your income – e.g., paystubs, W-2s, and tax returns
Current assets – e.g., bank statements
4. Rate Included in the Response
Preapprovals will include a specific interest rate based on the market at the time of the preapproval. Keep in mind, the rate is subject to change based on market conditions until you have accepted an offer and can lock the rate. Rates may be expressed as an interest rate and/or an annual percentage rate (APR).
5. Mortgage Officer vs. Mortgage Underwriter
Axos Bank preapprovals are fully underwritten and signed by our mortgage underwriters. Loan officers generally don’t underwrite loans; underwriting and credit approvals are performed by authorized underwriting personnel. If your preapproval is signed by your loan officer, then it’s not a true preapproval!
Making the leap into homeownership is no small feat. There are lots of steps to take throughout each phase of the process. Partnering with knowledgeable experts can help you keep your home purchase on track and avoid roadblocks.
Once you’re ready to make the move, let us know. We have an entire team of mortgage experts that’s available to answer your questions and guide you through the financing process.