Contrary to popular belief, getting approved for a loan is not the first step in buying a home. It’s getting the motivation to buy a home! Visit an open house or two. Jump on the internet and start surfing real estate sites and check out home listings. That should get your juices flowing. Now that your interests are piqued, pick up the phone, connect with a loan officer and start the loan process. Definitions will vary on types of loan approvals. Your circumstances will dictate which type of approval is the best for you. Here is my list:
Although not considered a loan approval, a “pre-qual” is often used as a springboard for many borrowers to move forward with the home buying process. It is typically a phone consultation with a loan officer. This tends to focus on general earnings, assets and liabilities, and an informal discussion over perceived credit score. Most sellers will require more than just a general conversation to determine the buyer’s ability to buy before accepting any purchase offer.
Experienced loan officers can determine whether a buyer is able to obtain a loan by simply reviewing a credit report, have a ballpark of the buyer’s assets along with general questions about employment history. Loan officers will issue a letter of credit approval which can be included with a purchase contract as proof the buyer is able to purchase a home subject to a bunch of conditions. However, with today’s strict lending policies and the higher percentage of loans being rejected, it is highly recommended to have an underwriter approve your file with full documentation before submitting an offer.
After satisfactory credit has been pulled and a loan application has been submitted, financial documents are collected and evaluated by the loan officer. It is then submitted for “computer or automated approval”. Depending on the type of loan, a financial analysis is evaluated by sophisticated software driven by Fannie Mae, Freddie, Mac, or GUS. Each has its own criteria for approval in addition to overlays by individual lenders. If the loan receives an “approval”, the loan officer will submit a letter of loan pre-approval subject to conditions. The conditions will be much less than a credit approval. This isn’t a bad method and is fairly common but take it a step further.
Full conditional approval
In addition to the steps for a pre-approval, the loan is then packaged by a processor and submitted for review by an underwriter. Depending on volume, this process takes about 48 hours. If approved, the loan becomes conditional on finding a home in the approved price range, clear title, satisfactory lender appraisal, and other conditions of the loan typically accomplished toward the end of the process. This is highly recommended prior to submitting an offer to purchase a home.
Congratulations! You’ve found your home, the appraisal is complete, and all conditions have been cleared. This is a full approval. The loan is sent to escrow to await signatures from all parties concerned and becoming a homeowner is only a matter of a couple days away. After taking the first step of getting excited to buy a home, take the second step and obtain a full conditional approval. Why invest time searching and previewing properties, identifying a property, negotiating an offer, dealing with inspections, appraisals, and out of pocket costs only to find out you don’t qualify for a loan? Have peace of mind with your home purchase!