Especially in a seller’s market, buyers with a mortgage pre-qualification are better armed for success in tendering their offers. The more comprehensive a pre-qualification or approval, the stronger the buyer’s ability to negotiate and to be seen as a better prospect to sellers. However, the more complete the process is, the harder it can be to keep your prospects engaged. Stressing the importance and benefits at this stage of the mortgage journey is key to happy and successful homeowners-to-be.
What is a mortgage pre-qualification letter?
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Simply put, a mortgage pre-qualification letter is the end result of a prospective borrower’s evidencing their ability to qualify for the mortgage loan of their choice. It’s essentially a pre-approval for financing before a property is found and an offer is accepted. Lenders will use mortgage calculators to analyze income, debts and assets along with an intended mortgage program and interest rate to calculate a maximum allowable monthly payment. That payment can then be correlated to a maximum purchase price with given allowances for other expenses such as taxes and insurance.
Once a property is secured, an appraisal, title work and any additional inspections required are completed. Provided the property is sound and the borrowers’ financial standing is still acceptable to the underwriter, the previously pre-qualified borrowers would then receive a mortgage commitment.
it’s important to realize that any pre-qualification letter will have a shelf-life that lasts only as long as credit and income verification documents are applicable for. Keeping documents up-to-date therefore becomes critical if shopping for a home exceeds the time frame for keeping verifications current. It can be standard practice for pro-active mortgage lenders to make borrowers aware of which documents expire at what intervals and to keep those regularly refreshed or re-submitted as needed.
How long does it take to get a mortgage pre-qualification?
Obtaining a mortgage pre-qualification letter is the first step along a proper consumer journey and can vary from minutes to days to weeks. It is highly dependent on both the lender’s process and the borrower’s financial wherewithal.
For mortgage bankers with a streamlined process of collecting the borrower’s application and supporting documents along with ready access to their loan origination system for data entry and credit pulls, the process can be completed just as quickly as data is entered and credit is scored.
Some lenders will issue pre-qualification letters based on credit and verbally conveyed income and asset information. However, until all information can be verified, borrowers, sellers and real estate agents should never rely too heavily on this type of mortgage pre-qualification. There are simply too many reasons why income that’s stated can differ from income deemed usable once actual documentation is reviewed by an underwriter.
In other instances, borrowers may be asked to fill out an online application and upload all the necessary documentation in order to base a review on the same actual documents that would be used for a full mortgage commitment. Many lenders prefer this route as it can render a far more accurate result that’s also far less likely to change. Considered more of a mortgage pre-approval than a mortgage pre-qualification, this offers many advantages and far greater dependability, even with the extra time it takes. Making a distinction between verbal and documented qualifications can make a difference where it counts most, and that’s winning the bid with a seller.
What information is needed for mortgage pre-qualification?
The basic information requirements for obtaining a mortgage pre-qualification are for income, assets and credit. If you’ve been smart and deployed intelligent marketing automation, your prospects will already be well vetted and informed of all of the following requirements.
A prospective borrower must prove that they have sufficient income to make the monthly mortgage payments and the other expenses of owning a home. Typically, a mortgage lender does not want to see more than certain percentages of gross monthly income expended for all housing costs and other regular monthly debt obligations such as car loans, credit cards, etc.
A prospective borrower must also provide evidence of having sufficient liquid assets to tender at least the required minimum down payment along with enough to cover closing costs, an escrow account for taxes and insurance, payment reserves, and any other relative costs specific to their intended purchase.
Credit requirements vary by loan program and intended transaction or property type, yet minimum credit scores will always be applicable and borrowers may need to provide written explanation for any derogatory information found on their report. Derogatory credit can be anything from late to missed payments, judgments, bankruptcies, foreclosures, Lis Pendens, fraud alerts, etc.
Income documentation usually encompasses the last two years of federal tax returns and W2 forms along with paystubs if received for the last thirty days. Asset documentation is verified via bank or other account statements for the last two or three months. Verifications will sometimes be done electronically directly with financial institutions or data aggregators, and the latter can apply to employers and income too.
Credit reports are pulled from service companies and usually entail collecting the information from all three major credit agencies, which are Trans Union, Equifax and Experion. These are referred to as “Tri-Merge Reports,” and each of these three agencies will report a FICO (Fair Issacs Company) score. The middle of these three scores is the one that most lenders will base their requirements and decisions on.
For borrowers who are self-employed, the information and document requirements will extend to tax returns and financial statements for their business as well.
For borrowers who already own property, information regarding occupancy, existing loans, leases if any, tax bills, etc., will also be needed.
The more unique or complicated a borrower’s situation, the more documentation is likely to be required. Tax returns will reveal a lot about an individual or couple, and borrowers should expect to be able to provide documentation and explanations for anything that may represent an obligation or liability.
When borrowers are retired and receiving income, award letters from the Social Security Administration or pension fund administrators, etc., will be needed. In some instances, borrowers will have financial planners that provide a steady income to the borrowers from income, dividends, gains and regularly scheduled liquidation of investment assets. A letter from the planner attesting to the dollar amount of distributions the borrower receives along with evidence of transfer will be required before an official mortgage pre-qualification will be issued.
Any other source of income will also need to be documented in order to identify the source, the amount, the frequency, and the likelihood or duration of continuance. This can entail verification forms sent to the provider or divorce decrees and settlement statements, etc.
How important is it for buyers to obtain a mortgage pre-approval letter?
In active markets favoring sellers, it is critically important to obtain a mortgage pre-qualification or approval letter, and it’s still a good idea in any market. The easiest way to understand the importance is to put yourself in the seller’s mindset. If you have two interested parties making an equal offer on your home with one having an official letter of mortgage qualification and the other not, which one would you be inclined to accept? In particular, if per the usual offer to purchase there is a time frame allowance for inspections, appraisals, etc., and time for applying for a full mortgage commitment, you’d be wise to select the purchaser with a head start on these activities.
Accepting the wrong offer in a multi-bid situation like this could mean that you’re waiting weeks or sometimes, even more, to find out if your buyer is truly qualified and will be approved for the mortgage loan they need to consummate the purchase. Some real estate sellers are even willing to accept a lower offer that’s a relative certainty over a higher offer that’s not.
All in all, a prospective customer journey should begin with a full-fledged and well-documented mortgage pre-approval process. It provides peace of mind and strength in negotiations or greater visibility and desirability with sellers.
Also, providing your prospects with ready access to use your mortgage calculators can allow them to see what the differences can be when real estate taxes and interest rates vary from house to house and from day to day. Using good marketing automation to deploy full workflows of educational content makes your job easy.
Every home is unique. When prospects find the one they really love, they want to be sure they win the bid. Losing out on the perfect home is frustrating. A similar home in the right price range may take months or even years to come on the market again. Being prepared and having the bulk of their paperwork out of the way and behind them when they can instead be busy with other important preparation for their move is far more comforting than the alternative.
Speaking of price range, it’s well worth the effort for prospects to know that a mortgage lender is willing to give them a loan for a home that’s in their target price bracket. A mortgage pre-qualification will usually have a maximum price or payment at a given interest rate that they qualify for. Knowing that is key when shopping for homes that fall within those maximums. After all, it’s no fun to fall in love with a house that they really can’t afford. Knowing and staying within the range they know will make shopping for a home far more fun and productive, and that’s the way it should always be.
How to Manage the Process of Mortgage Pre-Qualification
There’s nothing better to streamline the process of mortgage pre-qualification from conveying the importance, to listing document requirements to outlining and nudging borrowers through the steps than an award-winning mortgage CRM program. The industry’s most used mortgage CRM is offered by Top of Mind Networks. If you would like to see what that looks like and what it can do for your business, just click here for a Surefire demo today.
Brian’s entire professional career has centered on real estate. He’s designed, built, and brokered homes. He’s provided over half a billion dollars in mortgage loan financing to everyone from first-time buyers to the CEOs of Fortune 500 companies.
He’s a published author with articles in periodicals, hedge fund websites and trade publications. Brian has traveled the country and been on broadcast radio to speak in front of hundreds of his industry contemporaries. He also created and developed hundreds of educational products from print to digital used throughout the U.S. and beyond, which make the process of buying and financing a home easier for all. Brian is a father, real estate investor, outdoorsman, pilot, skier, golfer and plays ice hockey in several men’s leagues every week of the year.