The Ins and Outs of Loan Approval, Pre-Approval, Loan Commitments and so forth…
September 2nd, 2008 Categories: Alexandria Dirt, Arlington Dirt, Falls Church Dirt, McLean Dirt, Real Estate Finance, Reston Dirt
As a general rule, one of the very first things I do when working with a new buyer (whether they are a first time buyer or even an experienced buyer) is to recommend they speak with a lender and obtain loan approval.
The reason for this is simple: Let’s say they’ve used an internet loan calculator to guess at their loan amount – did someone explain to them the tax relief they will benefit from? Or perhaps they actually talked with a lender and did some sort of preliminary approval where they provided their salary information and debt information, but perhaps they didn’t discuss more detailed financial matters like alimony (either being given OR received), investment properties owned, etc… These factors can have a HUGE impact on a buyer’s ability to actually obtain a mortgage.
I usually like to have someone talk with a contact of mine – for no reason except that keeping the communication lines open during this process is HUGE. It doesn’t matter to me who originates a loan for my clients in the end, as long as they get as good of a program as they can – good rates, good terms, and the RIGHT program fit for them. But during the process, questions can arise – here’s one that happened lately:
I have a client who wants to purchase a condo – he has his preliminary loan approval in place for a particular amount – and the lender is out of state. So we set out looking at properties in a particular range that we are estimating will work with his loan amount and the amount of cash he has set aside for this purchase. However, pretty soon, some questions came up:
What condo fees were used for the approval? (Usually a lender will put in some sort of estimate)
What about property taxes?
Oh, and since the lender is out of state, how were they able to complete a good faith estimate perhaps not knowing what our usual and customary charges are here in Virginia to the buyer?
At this point, since we were unclear on the answers, my client agreed to talk with one of my local lenders, and we’re in the process now of understanding exactly how much home he can afford. At least we’ll know what the range is and negotiate the best deal on a property with confidence that he can afford it.
So perhaps I digressed a little from the title of this article – here are some brief descriptions of different terms you’ll hear from the lending world:
Pre-Approval – this means some basic information has been provided to the lender, probably without verification in order to establish a baseline of affordability. Sometimes lenders will even issue pre-approval letters, but they all state that they are subject to income/asset verification, so really, they’re not particularly strong.
Loan Approval – this usually means that all income/asset verification has been done as well as a credit check. This is a much stronger term and generally is used when submitting a contract. Sometimes, depending on the lender, the application has even made it through the underwriting process already. Barring any issues with the property, it’s smooth sailing from here.
Loan Commitment – this is when the loan has not only been approved, but the bank has already earmarked the funds to consummate the transaction. This is the strongest level of approval that exists.
So there you have it – a lesson on loan approval types, terminology and the like – and also some reasoning as to why I’ll ask you to speak with a lender and why it’s important! It’s a much smoother process when this is done in advance and we can start out with the best foot forward not wasting any time at all in finding that dream home.
If you’d like to talk about the process or get started, call me today! I have some great local lenders I can refer you to – with a great team around you’ll be in great shape for a successful outcome!
Happy Tuesday
Jennifer
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Impressive discussion on the financing side of the biz. I think we all learn along the way that if we let clients “go free” on searching out financing options then it will eventually backfire on our work. Buyers should be looking for service on the mortgage side, not necessarily the lowest interest rate. keep it up!