Pre-Approval or Approval? That Is The Question.

One of the biggest parts of my job (if not the biggest) is analyzing documents from clients to determine if they are eligible for financing for a home they want to buy or refinance. By looking at income docs (pay stubs, W2's, tax returns,etc..), asset statements (checking and savings, 401k & retirement statements etc...) as well as the up to date credit report which will give me the credit scores and current obligations (car payment, credit card payment, mortgage history), I can get a good idea on what my client is able to afford for a mortgage payment.

Sometimes in the case of a purchase, I won't know exactly what a client is approved for because I don't have a property price and I won't know the yearly taxes and homeowners insurance premium. However, what I do is get an idea of what communities a client is looking in to buy and then I will have a good idea of what the taxes are based on the sales price of what I think they can afford.

The next step is running the loan scenario on one of the approval engines on the Internet that are available to mortgage originators. The loan is viewed by the AUS (Automated Underwriting System) which determines credit worthiness based on the information on the application and the current guidelines for the type of mortgage I am trying to obtain for my client.

If I receive a decision of "Approve/Eligible", I know I'm good to go (providing all the information on the application is CORRECT). If receive a decision that reads "Refer", that means that there is something wrong with loan and most likely would not get approved.

So based on all the documentation I have looked at and getting a "Approval" from the AUS, I can tell my clients, they can proceed with buying a house or getting refinanced.

That is a Pre-Approval.

That is not an approval. Because what happens next is that the lender must look at the complete package (along with the appraisal and title work, which I wouldn't have in the pre-approval stage) and decide if they will give my clients a formal approval. No matter what I think or what kind of AUS decision I have, a lender has the final say on if my clients get approved or not.

Assuming that the appraisal and title has no issues, and I have done my job correctly, I am fairly confident that I will get a formal approval from the lender. It doesn't make sense to send a file to a lender that I know will be rejected. Not only do I have to answer to my client, I have to answer to real estate agents as well. I certainly do not want to waste any one's time.

That causes a lot of anger.

There certainly are files (especially with tighter lending guidelines) that are iffy and have a 50-50 chance of being rejected by the lender for some reason or another. As a good loan officer, I will let all parities in the transaction know (without giving out private & sensitive details) that we could see an issue with the file and it may be tougher to get through.

But if the lender is happy with what they see after they examine the whole loan file, they will give the okay to proceed.

This is the formal Approval. (sometimes know as a Conditional Approval)

With this approval, a list of conditions is included. These conditions are where the lender is asking for updated or additional documentation. These extra conditions could include a recent pay stub, bank statement or copy of the credit report. Or they may want to see the appraiser's license or insurance. It could be anything.

But the idea is to send in everything in the file I believe that the underwriter would want to see. You have to look at the file from the underwriter's point of view and anticipate what they possibly they could ask for. By doing this, I save time and make the job of the underwriter easier (which is what I want when they are looking at my files!).

It is better and easier for me and the client to ask for all documents up front that I think the underwriter will need to make a decision instead of making repeated phone calls to ask for new documentation.

When all the conditions are met and the lender is satisfied, the lender will issue the Clear to Close and we can set up the closing.

So that is the difference between a Pre-Approval and an Approval. Some people will tell you that the decision from the AUS is as good as a formal approval. I'm here to tell you it's not. Based on recent experience, I have lenders that will overrule the Automated Underwriting System decision even if you have an "Approve/Eligible" file. The lenders have their own guidelines which can override the AUS guidelines.

Remember, "He who has the gold is King".

Before I go this week, I would like to comment on the Bernie Madoff scandal. Today, he plead guilty (really?) to ripping off billions of investors and is expected to get a sentence of 150 years in prison. He said he was “deeply sorry and ashamed”. Well thanks Bernie!

Short of execution, there is no punishment good enough for someone who rips people off in my mind. The only we can do now as a society is to punish this man so severely that it is a deterrent to anyone think about doing the same thing. I believe that all his assets along with the assets of anyone that would have benefited by Madoff's criminal actions, should be surrendered, sold and then distributed back to the investors by percentages of loss.

I know the punishment should justify the crime, but so should the pain and suffering by the victims justify the punishment.

Let's end this now before I get started.

If you have any comments on this article, I would love to hear what you have to say!

Feel free to comment below. Thanks for reading!

Dan Tenchall
Great Lakes Mortgage Funding

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