Tuesday, March 5, 2019
To an outsider, it probably seems like the mortgage industry specializes in really confusing lingo. Take the term preapproval as an example. The goal of the preapproval is to give home buyers a realistic idea of how much they can afford when shopping for a home.
The problem is even the term preapproval can mean different things depending on the situation and how lenders approach it. It can be a lot to figure out when you’re looking to buy.
In this post, we’ll compare two common types of mortgage approval for shopping – prequalification and preapproval – as well as their differences (if any). Then we’ll look at how the Power Buying ProcessSM from Rocket Mortgage® by Quicken Loans® helps clarify this cloudy mess with three levels of approval.
What Is the Difference between Prequalification and Preapproval?
The terms prequalification and preapproval are sometimes used to mean the same thing when it comes to getting a mortgage. However, the terms may also mean something different. It all depends on which lender you’re talking to. Because of this, you need to be absolutely clear about what your prequalification or preapproval actually means.
In the following sections, we clarify the most common industry uses for the terms prequalification and preapproval. Knowing the typical process involved will help give you some idea of what questions to ask so you know what your mortgage approval means.
In a prequalification, your credit is typically pulled so that the lender will get a look at your three-digit FICO® Score and report. This score is used to determine what loans you could qualify for. For example, the lowest median FICO® Score necessary between Equifax, Experian and TransUnion is 580 for an FHA loan and 620 for a conventional loan.
By viewing your report, the other thing a lender gets a look at is your total revolving and installment debts. Revolving debts are things like your credit card bills. Meanwhile, installment debts include student, personal and car loans.
Lenders will also ask you for verbal verification of any income and assets you plan to use to qualify for the mortgage. By comparing your debts to your income, lenders get something called your debt-to-income ratio (DTI). This lets them determine the monthly payment you can afford, which in turn gives them the maximum price of the house.
Because your income and assets aren’t actually verified for a prequalification, real estate agents and sellers may not look at a prequalified buyer as seriously as someone who has taken the next step.
If you’re preapproved, it could mean the lender has taken the extra step of verifying your income and assets. This is done by gathering things like your W-2s, tax returns, pay stubs and bank statements.
If the preapproval is a bit stronger, the lender could mean they pulled your credit and got a verbal estimate of your assets and income. The latter would be the same as a traditional prequalification.
We’ll get to the Power Buying ProcessSM, our solution for bringing clarity to your mortgage approval process, in a minute. For now, let’s answer a few more of your common questions.
How Long Does Prequalification for a Mortgage Last?
It’s hard to give you an across-the-board answer to this question because each lender has their own policies. At Quicken Loans®, our Prequalified Approval – our term for prequalifications – lasts 90 days.
This is also true for our Verified ApprovalSM, but more on that later.
Does Mortgage Prequalification Affect Credit Score?
When a lender looks at your credit report to determine your eligibility for financing and the kind of terms you can get, they’re required to tell the credit bureaus that you’re looking for a loan. They do a hard credit pull. Typically, this brings about a slight temporary lowering of your FICO® Score.
If you continue to be responsible with your credit – doing things like not utilizing more than 30% of your overall credit limit and paying your bills on time – your score should rebound relatively quickly.
It’s also worth noting that if you’re shopping around and pull your credit with several different lenders in order to check rates, and you do this within a 30-day span for the same type of loan, it all counts as one credit pull.
Does Prequalified Mean Approved?
As a home buyer, you should know that being prequalified or preapproved – or approved, in the case of Quicken Loans – doesn’t mean you’ve received official mortgage approval. Your income and assets will have to be fully verified by the lender. Once you find a house, it will have to be appraised to establish its value and make sure it meets basic safety and livability standards.
How should you think of your prequalification or approval? It’s best to think of it as giving you a good idea of what you can afford when you’re looking to put in offers on homes.
The purpose of a prequalification or preapproval is really to give both you as the buyer and the sellers a realistic idea of what you can afford. It also shows you’ve done the legwork to talk to lenders about obtaining mortgage financing which can indicate seriousness. As we’ve seen though, not all mortgage approvals are created equal. How can you cut through the clutter and tell the difference?
Power Buying ProcessSM
At Quicken Loans, we have three levels of approval in our Power Buying ProcessSM in order to more precisely specify the level of examination your mortgage approval has received.
In a Prequalified Approval, we pull your credit to get your score and a look at your debts. Verbal income and asset statements help us calculate your DTI and let you know how much you can spend, but the best way to think of this is as an estimate. Because your income and assets haven’t actually been verified, it’s not as strong as it could be.
Sellers and their real estate agents prefer offers from people with verified income and assets. There’s just less chance that the deal falls through at the last minute. For this reason, we encourage everyone to get a Verified ApprovalSM.
During the Verified ApprovalSM process, we pull your credit. We also have you share income and asset information with us. We promise to verify your approval amount within 24 hours of you getting the requested documentation back to us.
A Verified ApprovalSM Letter should give you the absolute confidence you need to back up the offer you’re making. In fact, if you don’t close based on our review of your documentation, we’ll give you $1,000.1
No one wants to pay more for a mortgage than they have to. One way to protect against that concern is to lock your interest rate when you see one you like so it doesn’t go up. However, until now, you’ve had to wait until you had a purchase agreement in place to lock your rate.
Available on 30-year conventional, FHA and VA loans, RateShieldSM Approval2 is intended to alleviate the interest-rate concern.
With a RateShieldSM Approval, you can lock your interest rate for up to 90 days while shopping for your new home. Should interest rates happen to go down by the time you find your new home, we’ll lower the rate to the current interest rate, where you’ll remain locked, giving you time to close your loan. If rates have gone up, we honor the rate you initially locked. Either way, you win.
This gives you the ability to protect your monthly payment because your interest rate won’t go up. Your offer will also have the strength and confidence on par with that of a cash buyer because you’ll know you can afford the home. This makes your offer very attractive to sellers in the competitive housing market we have today.
Ready to give our Power Buying ProcessSM a whirl? You can get started online with Rocket Mortgage® by Quicken Loans®. If you’d rather talk to one of our Home Loan Experts, you can get in touch with us at (800) 785-4788. If you still have questions, go ahead and leave them for us in the comments below.
1 Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply. Verified Approval within 24 hours of receipt of all requested documentation.
2 RateShield Approval locks your initial interest rate for up to 90 days on 30-year conventional, FHA and VA fixed-rate purchase loan products. Your exact interest rate will depend on the date you lock your rate. Once you submit your signed purchase agreement, we’ll compare your rate to our published rates for that date and re-lock your interest rate at the lower of the two rates for an additional 40 to 60 days. Quicken Loans reserves the right to cancel this offer at any time. Acceptance of this offer constitutes the acceptance of these terms and conditions, which are subject to change at the sole discretion of Quicken Loans. This is not a commitment to lend. Additional conditions or exclusions may apply.
by Kevin GrahamMarch 1, 2019Home Buying/Selling
Reposted by Michael James Hansen
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