October 22, 2017

Fast Track To FHA Loan Approval

Many people begin their search for a new home on the internet.  Online searches are an efficient way to view property listings as well as determine the price range for different homes in your area.

Once a home buyer has decided it is time to buy, one of the next first steps involve selecting a mortgage company to obtain financing.  Underwriting standards have become much more stringent over the last few years which means that fewer applicants will be approved for mortgage financing.  Accordingly, most Realtors will insist that a potential home buyer present documentation from a mortgage company indicating that they are qualified to obtain mortgage financing.

The two basic types of initial qualification that a mortgage company can provide to a potential home buyer are a pre-qualification or a pre-approval.

A pre-qualification is issued by most mortgage companies based on preliminary questions to the borrower about credit, income and assets.  Based on the verbal answers provided by the borrower, a quick analysis of the borrower is performed and if basic FHA guidelines appear to be met, the lender will issue a “pre-qual letter”.   A pre-qual letter provides little assurance that a borrower will wind up being approved for a mortgage since the lender did not do an in depth review of the applicant’s income, assets or credit.

A pre-approval is a much more stringent examination of a borrower’s ability to obtain mortgage approval.  Typically, a pre-approval will involve evaluating the borrower’s credit report and examining income documentation and bank statements.  Almost all of the steps of loan approval are performed except for obtaining an appraisal and title examination.

Obtaining a pre-approval should be the preferred route for most borrowers for the following reasons.

1. A pre-approval will provide the highest level of comfort possible that the borrower’s mortgage application will be approved.  Providing a pre-approval letter to a realtor can put a buyer in a better negotiating position since mortgage approval is highly likely.

2. Obtaining a pre-approval can save the borrower money by avoiding nonrefundable expenses only to find out later that the mortgage request was turned down.   As part of the home buying process, a borrower can pay upwards of $1,000 for an appraisal, home inspection and application fees.

3. Since a pre-approval involves actually pulling a credit report, the borrower can be made aware in advance of issues that may result in delaying or turning down the mortgage application.   Many borrowers may feel that they have excellent credit only to find out that there is a small collection account outstanding or a late payment that they were unaware of.   Knowing about potential credit issues ahead of time give the borrower the opportunity to resolve them in a timely manner with the lender’s assistance.

4. A pre-approval letter can also alert potential buyers if the income is insufficient for the amount of mortgage loan being sought.  Many applicants may think that their income is sufficient for loan approval when it is not.  For example, most people would assume that overtime could be included as qualified income for a mortgage.  Underwriting rules, however, usually require a two year history of overtime and a letter from the employer stating that the overtime will continue.  Obtaining a pre-approval letter would eliminate this type of issue.

5. Realtors understand that it can be difficult to obtain mortgage approval given the stricter underwriting rules in place.  Therefore, in order to best serve their client (the seller), most realtors want to see a pre-approval letter to reduce the chance that the buyer will be turned down.  This is a significant issue to both the seller and the realtor in today’s weak real estate market – no one wants to keep a property tied up and off the market for months only to find out later that the buyer was never qualified to obtain mortgage financing.

6. There can be frustrating delays and issues involved in purchasing a home.  With a pre-approval letter, much of the stress of the mortgage application experience can be reduced.