Home purchasers sometimes get into trouble because they are not clued into the sequence of steps involved in financing their purchase. These mortgage concepts also apply if you are refinancing. The mortgage steps are pre-qualification, pre-approval, approval and lock.
Pre-qualification is an opinion that your income, assets and current debts qualify you for a loan of some specified amount. The opinion may come from a lender, a mortgage broker, or a Realtor.
Pre-approval is a conditional commitment by a lender to make a loan prior to the identification of a specific property. On a pre-approval, unlike a pre-qualification, the lender verifies the information you provide and checks your credit. A pre-approval will stipulate a loan amount or monthly payment, but not necessarily the loan type or the price.
The lender’s commitment under a pre-approval is always conditional, but rarely are the conditions spelled out. Pre-approvals don’t have expiration dates, but some considerable time may elapse before the borrower receiving a pre-approval comes back to convert it into an approval. During that period, things can happen that can possibly cause the lender to back off. For example, the borrower’s credit deteriorates, or she loses her job. No one can reasonably expect a lender to approve a loan in those circumstances.
During this period, there may or may not be market changes of adverse impact, such as the tightening of underwriting requirements. Sometimes the lender may have pre-approved a loan and the market changes adversely to the point where the same loan would no longer be approvable. Fortunately, abrupt changes in underwriting rules occur very infrequently
Approval is a commitment by a lender to make a loan. Unlike a pre-approval, a specific property (along with its appraised value) is identified, and the loan details are spelled out. These include the type and purpose of loan, down payment, and type of documentation. It will also include an interest rate, even though a rate is not firmly established until it is locked. The presumption underlying an approval is that the probability of closure is high – much higher than with a pre-approval.
It is not 100%, however, because borrowers sometimes drop out, and sometimes one or more of the conditions that accompany the approval are not met. Approval letters contain “Prior to Doc” and “Prior to Funding” conditions, which are checklists of nitty-gritty details that must be completed before the final documents are drawn, and before funds are disbursed. Sometimes, one of these details derails the train.
Lock is a commitment by the lender to a specified price – rate and points. Ordinarily, lenders lock at the borrower’s request, and view the borrower as being committed as well. Since locking imposes a cost on lenders, some of them charge a nonrefundable fee which may be credited back to the borrower at closing.