You’re ready to buy a home or uh oh, you’ve found one, and now you need a pre-approval, FAST so you can make an offer. If you have a trusted source, awesome, use them. If not, take 3 minutes for a quick lesson in asking the right questions upfront and learn why it matters where that pre-approval comes from. Start with the term “Pre-Approval.” Do you know what it means or better yet, what it guarantees?
Insider scoop – there is no formal definition or guideline any Bank, Credit Union, Independent Mortgage Bank, or Mortgage Broker must adhere to when issuing a pre-approval to a borrower. This has led to the industry-wide practice of not underwriting pre-approvals. Spoiler alert-not a practice I participated in.
The Problem
When the borrower hits underwriting, the wheels come off. This is also the moment a non-underwritten pre-approval can turn into an apology from the lender, and they walk away, citing their inability to close on the loan.
Now a home has been removed from the market, the seller has likely made an offer on another home, the buyer is blindsided, and the timeline for resolution is absurdly tight.
No confirmation of qualification can be made by ANY lender, whether they are a bank, credit union, independent mortgage bank(IMB), or a mortgage broker before a borrower’s application and documentation have been fully reviewed and run through underwriting.
Behind the Scenes in Underwriting
Since the events of 2008 and the introduction of risk-based pricing by the Federal Housing Finance Agency, qualification requires more than a pulse, it requires full documentation and an underwriter’s approval. That underwriter is now an automated process for many loan programs with an underlying matrix of fees.
Boring But Important So Read This Part
During underwriting, the fee matrix comprised of risk-based price adjustments, known as Loan Level Price Adjustments (LLPAs), are applied that significantly impact the overall cost and qualifying for any borrower using a conforming loan program. Numbering 26 in total, LLPAs factor in credit score, debt-to-income, down payment and property type among other things.
Check enough of the boxes, and the fee structure alone can bump a borrower from qualifying to a non-qualifying status. To be clear, these are NOT lender fees. They are imposed by the Government Sponsored Entities (GSEs) also known as Fannie Mae and Freddie Mac that provide the source of funds for all Conforming mortgage loans in this country.
Highly Qualified Buyers Now Included
Initially designed to make fees commensurate to borrower risk, following the changes effective May 2023, LLPAs now significantly impact well-qualified primary residence purchase buyers and those seeking second homes, investment properties, and cash-out refinances.
I published Unpacking the 2023 Price Changes to Conventional Loans last May when the changes took effect and encourage you to read through the details should you want more insights and some numeric examples.
Avoiding LLPAs
Choosing a non-conforming loan product such as a Jumbo Loan or FHA Loan, avoids LLPAs but doesn’t negate the need for an underwritten pre-approval.
Jumbo loans (loan amounts higher than $766,550) and FHA loans are not part of the government-sponsored entity (GSE) loans and are not subject to LLPAs.While Jumbo loans avoid LLPAs, they typically require higher down payments, cash reserves, and a 780+ credit score to qualify. A non-underwritten Jumbo loan pre-approval relies on the experience your loan advisor has working with the specific loan offering and their depth of underwriting knowledge.
FHA loans are typically first-time buyers (FTHB) or home equity conversion mortgages used by 62+ homeowners leveraging existing equity to make their next home purchase. Though guidelines are more flexible on both the FTHB and the long-time homeowner using equity, it’s all new territory for the borrowers in both cases and a misstep is never fun.
The Takeaways
- Ask this question, “Is this a fully underwritten pre-approval I can close with?” Anything short of yes is no.
- Each loan program has an individual set of qualifying criteria. Each buyer has an individual set of qualifying capabilities. The more loan options a lender offers, the broader your choices. That’s a twist on what’s your rate.
- seek a lender partner who can use a single pre-approval and documentation across various lending programs to maximize your savings, minimize inconvenience, and optimize interest rate.
- Interest rates vary based on the loan program, buyer qualifications and property type
Fairway Underwrites Pre-Approvals
I’m finishing up my 29th year in the mortgage industry, have thousands of clients and partners in this relatively small market, and seek to share insights that improve the process and integrity of our industry.
Fairway Independent Mortgage Corporation is the country’s largest privately owned mortgage bank, recipient of the J.D Power Award for customer service in lending and currently ranked second in the nation for total loans closed among retail mortgage lenders. We save deals every day by taking that extra step to work through every possible scenario with a borrower to help them qualify.
