Pre-Qualification vs Pre-Approval

The Pre‐Qualification…Your FIRST Step to Financing a Home

 

Because of the complexities of home financing and the numerous loan programs available to the general public, prequalifying must be done by a qualified loan agent (preferably a mortgage originator) in person, via e-mail or over the phone. The prequalification process is both objective and subjective. Lenders look at much more than just how much cash someone has or have much do they make. They look at the “overall picture”, for what lenders call compensating factors, of the applicant. These compensating factors include income, debt, assets, and credit. Consulting with a qualified loan agent, can help you determine which compensating factors should be emphasized to the lender.

Income

Employment and Bonus Income Commissions Income Self Employment Investment

Interest Income

Debt

Credit Card Debt Auto Loan Debt Student Loan Debt

Personal Lines of Credit

Assets

Savings and Checking Stocks, Mutuals, Bonds

401k, Pension and Stock Options

IRA’s, Profit Sharing

Credit

New Accounts Closed Accounts Derogatory Accounts Inquiries

and Liens

 

The Pre‐Approval…Solidifies Your Home Buying Position

Once an applicant is prequalified, the next step is the preapproval. This involves the lender verifying one’s income, debt, credit, and assets. This is done by sending the lender 30 days of pay-stubs,

  •   W-2’s and 1040’s for the last two years
  •   Bank statements on all assets for the last two months
  •   Verification of credit by credit report
  •   A copy of your driver’s license

 

Once the preapproval is done, the buyer strengthens their buying position. Now, buyers have a “walking credit card” to purchase a new home! Buyers should never start their home search without being preapproved. The preapproval is usually valid for 90 days (sometimes longer) as long as the applicant’s income, debt, assets, and credit have not worsened or rates have gone up or loan programs have been eliminated.

October 20, 2019

 

Ref: Prequalification for John and Jane Doe                                           (Prequalification Sample)

 

To whom it may concern,

 

Based on the information provided to me, the above referenced client qualifies for the following:

 

Max Purchase Price Down Payment Loan Program PITI Payment Type of Property
$875,000 20% Fixed or Hybrid $4129/month Home

 

Notes: The PITI payment above is based on principle, interest, taxes and insurance based on a monthly basis. Usually you only pay principle and interest on a monthly basis.

 

Tax Benefits

 

As you may know, once you purchase a home, you are entitled to the tax benefits associated with

home ownership. Below you will find the purchase prices as stated above, that provide the approximate tax write off, net tax benefit, and net effective PITI payment associated with owning versus renting.

 

Purchase Price Tax Write Off Net Tax Benefit Net Effective PITI Payment
$875,000 $3308/month $793/month $3336/month

 

Notes: The above info can vary based on the actual rate, payment and household income of the borrower(s). For a more complete analysis of this benefit, please contact your CPA, tax planner or accountant.

 

Congratulations, you are now pre‐qualified. The next step is the pre‐approval process. To start this process, we will need to meet in person, and I will need you to bring the following with you:

  •   Copies of paystubs for the last 30 days.
  •   Copies of w‐2 and 1040’s for the last 2 years.
  •   Copies of bank statements for the last 2 months, for checking, savings, stock and 401k.
  •   Copy of driver’s license or passport.

 

Once you have put this list of items together, please contact me to schedule an appointment. Thank you for your time and interest.

 

Sincerely,

Rob McCarthy

Senior Mortgage Planner

October 20, 2019

 

(Prequalification sample) 

Ref:   Pre‐Approval for Home Financing

 

Dear John and Jane,

 

This letter is to inform you have been pre‐approved for the purchase price of $875,000.00 based on 20% down. Your credit, income, debt and assets have been reviewed and are satisfactory to the lender.

 

This pre‐approval is subject to the following conditions:

 

  • Review of preliminary title report from lender.
  • Review of appraisal of property per agreed contract price by lender
  • Review of purchase contract by lender

 

Should you have any questions, please feel free to call me. Thank you for your time. Sincerely,

Rob McCarthy

Senior Mortgage Planner