by Khareem Cabey Question: “I was pre-qualified by a mortgage lender a week ago, and they have since been following up by email and asking for various documents. I did the pre-qualification process online just by providing some basic information about my income and the type of loan I’m seeking. My question is, if you are pre-qualified for a mortgage, is there a good chance you’ll be approved by the lender?”
Getting pre-qualified is a good way to get the ball moving, and to start the flow of documents between you and the lender. But, unfortunately, it doesn’t mean you’ll actually be approved for the loan. There is still a long way to go at this stage.
It’s important to understand the terminology being used. Here is what you should know about pre-qualification, pre-approval, underwriting and final approval.
* Pre-qualification is when the lender tells you whether or not you might qualify for a mortgage, based on limited information about your financial situation (and usually without any verification). They may also present you with a rate quote, or a range of possible mortgage rates, based on your qualifications.
* Pre-approval is a more in-depth review process. This is when the lender actually starts requesting documents to verify your income, assets and debts. There is some degree of verification during this process.
* Underwriting is the most in-depth, intensive part of the review process. This is when the lender’s underwriter puts your loan package under the microscope to determine whether or not it’s a “good” loan. The underwriter wants to ensure the loan meets the lender’s minimum requirements, and also the minimum requirements of any secondary agencies such as Fannie Mae, Freddie Mac, FHA or VA.
* Approval is when the underwriter says your loan is “clear to close,” meaning you have checked all of the boxes and no serious issues were found. At this point there’s a pretty good chance (greater than 70%) that the loan will close, as long as nothing changes with your qualifications or the status of the home.
As you can see, the level of verification increases with each step. Pre-qualification is often done online through the lender’s website, so there isn’t any verification of documents (such as bank statements, W-2 forms, etc.). With pre-approval, there is usually some verification of documents, along with a credit check. During the underwriting stage, the underwriter will thoroughly inspect each document, and may even request additional documents from the borrower. This is the typical path to final approval.
Getting back to your question: Does being pre-qualified for a mortgage mean I will be approved? The answer is no, it doesn’t mean you’ll be approved for the loan. There’s a lot that can still go wrong between the pre-qualification and the final approval. The underwriting stage is where most loans “fall through.” That’s the part of the process you should be most concerned with.
Neither pre-qualification nor pre-approval is a commitment to lend. They are not guarantees. So it’s entirely possible to be denied a loan even after you’ve been pre-qualified by the lender. It might be a good way to get the ball rolling, and to initiate a dialogue with the lender. But that’s about it.
What Happens After I Get Pre-qualified?
So what’s next in the process? What happens after you get pre-qualified for a mortgage? In most cases, the lender will begin requesting financial documents from you. The usual suspects include tax returns, W-2 forms, bank statements, pay stubs, and sometimes letters of employment. The lender will use these documents to verify your income and assets, and to underwrite the loan. They’ll also check your credit report and score.
Once they have all of the required documents, they’ll send your file to the underwriter. We talked about this earlier. If everything checks out with the underwriter, you will be cleared to close. That’s when you can breathe a sigh of relief.
