As we all know, preliminary mortgage approval or mortgage pre-approval as it is commonly known, is the first step toward buying a home. But is it a very effective process to judge a borrower’s credibility to get a mortgage to buy a property? Many mortgage experts doubt that! It should be remembered here that mortgage pre-approval is not a process which is free from errors as the pre-approval documents are not reviewed by the underwriters. But again, you cannot even do without this pre-approval process.
Pre-approval process – How it changed over the time
1980s – Mid 1990s: During this time, mortgage pre-qualification was given more importance. It was done by the real estate agents. But they never went for any kind of credit checks. To determine the monthly mortgage payments, the interest rate factor was taken into consideration. In order to determine the qualifying ratios and buying power of the borrower, various forms were used. People from the mortgage industry were not involved.
Late 1990s and the start of 21st century: The mortgage industry grew leaps and bounds during this time period. During this time, the mortgage reps/ loan officers took over the pre-approval process from the real estate agents. They were mainly sales people. Thus, there was no uniform process to make sure who will qualify and who won’t. At this time the pre-approval process only included a telephonic conversation and a few calculations. With our progress into the 21st century, technology improved and mortgage financing became further easier. During this time, pre-approval became automatic. This is because, given in any situation, mortgage program could be found for borrowers. People with marginal credit, no down payment, no job, etc. could also easily qualify for a mortgage.
2008 – Till date: The bubble-burst and the market collapsed. The economic crisis and the real estate crisis came hand in hand. This changed the underwriting process forever. Now everything is double checked or triple checked. Each and every financial detail is examined thoroughly. Apart from pay stubs and W2 statements, now tax returns are also checked before a lender approves you for a loan. Sourcing evidence for unidentified deposits has to be provided.
Even though you have provided all the documents, there is no guarantee now-a-days that you will get the loan. This is mainly because it is the loan officer who does the loan approval but the final loan closing is done by the underwriter. Underwriters are the authority to give final approval to your loan. Unless they clear your file, you won’t get the mortgage. When the mortgage approval took place, the underwriter did not approve your file. There are many guidelines for the underwriter to follow. So, if you do not satisfy his requirements, your file will be rejected. This is where the sham lies in the whole pre-approval process.
Thus, the ball lies in the court of the underwriter. We can just expect that we qualify as per the guidelines of the underwriter so that we are able to close the loan.