Pre-Qualified vs. Pre-Approved vs. Final Approval

The terminology surrounding and even the actually act of getting a home loan may seem confusing, overwhelming, or complicated.  I am going to attempt to clarify the terms most commonly heard when trying to get a home loan.

Pre-Qualified:  This is a no commitment term that pretty much anybody can do who understands the math required.  You can do this at home if you like to figure out how much a lender MIGHT be willing to lend you.  Or you can contact me and i can ask you a few questions about your finances and give you a ROUGH estimate of what price of a home a lender MIGHT be willing to make a loan to you.  This will be based on a percentage of your Gross annual income as well as your total DTI (Debt To Income) ratio.  DTI includes car payments, credit card debt, child support and any other financial obligations you may have.  This does not include things like utilities, because technically if you do not wish to buy power from SCE you are not obligated to.  I am not including the percentages here because lenders change their criteria based on current market trends, Government regulations and their own risk tolerance.

Pre-Approval:  This is a written commitment on the part of the lender to fund a portion of the purchase price of your home.  In the process of pre-approving you for a loan the lender will pull your credit report and request and verify your financial information, such as tax returns (traditionally the prior two years), bank statements (to verify down payment funds, they also want to know that you have the ability to fund your portion of the home purchase price), employment history (traditionally two years) and maybe a few other things that will give them warm fuzzies as they write that check for tens to hundreds of thousands of dollars.  Once they are satisfied that you are financially fit to lend to then they will give you a letter with the terms and conditions that they are comfortable with, such as the value of the loan, the time frame for payments (amortization schedule, balloon payment schedule) and the interest rate for the loan.  This letter will be required when you make a offer on a house along with your earnest money deposit into escrow.

Final Approval:  This happens at the end of the escrow process and there are KEY REQUIREMENTS that must be adhered to and completed before the lender will release their funds.  An appraisal will be performed to determine the actual current market value of the house.  The lender will be securing their loan with a recorded Trust Deed on the property being purchased and they want to make sure that if you default on your obligation to pay them that they can re coupe as much of their funds as possible.  The lender will also perform a final check on your finances so keep your tax records and employment history handy along with everything else that they asked for at the start.  You may need to resend it to the loan officer again in order to get the loan.  Also... here it comes... WARNING: DO NOT make a major changes to your credit profile while you are in escrow.  That means no new credit cards, do not finance a new car (I know you are excited about your new life in that awesome house, but just wait the 30-45 days) if you make major changes like these you can throw yourself out of the lender's credit criteria and you will face the threat of falling out of escrow and losing the house along with your earnest money deposit.  Paying off a small debt on a credit card or making a final payment on the car you have had won't drastically alter the lender's opinion of your credit, those kinds of activities just make you look financially responsible which will most likely add to the warm fuzzy factor when the lender disburses funds.  After you get the final approval that is when pens come out, property title is transferred, you get keys and move-in!

Yay for you!