What is it?
Most buyers use a mortgage loan from a lender to purchase their home. Prior to placing an offer on a home, buyers need to obtain some type of letter from the lender indicating that they are qualified for the loan. This is typically called a pre-approval, though there are multiple levels and names. A pre-approval letter is essential to accompany a buyers offer.
What are the Different Types?
As mentioned above, there are three different levels:
PRE-QUALIFICATION: Pre-qualifications were once the norm for buyers making offers. The problem with these, is that anyone with a calculator could create one. These don’t include a review a buyers assets or credit, nor verification of income. For this reason, they are now considered outdated and hold essentially no value in our market.
Typical closing time frame: N/A
PRE-APPROVAL: A pre-approval is the mid-level letter. When a buyer obtains a pre-approval letter, the buyers’ credit is pulled, and assets and income are verified by documents the buyer has (though not yet independently verified with the buyers’ bank and employer). This information is entered into a computer system called Automated Desktop Underwriter (or ADU for short), and it returns a pre-approval amount. This is the standard for most offers.
Typical closing time frame: 30-45 days (some lenders may need up to 60 days)
PRE-UNDERWRITING: For buyers who want an edge in their offer, they can request that their lender put their file through pre-underwriting. When a file is pre-underwritten, the assets and income are fully verified and vetted, and a near full approval is issued. At this point, the only true variables remaining are the subject home and the continuation of the buyer’s employment. This is about as close to secure as a cash buyer, though the closing time frame can be longer than a cash purchase due to needing an appraisal. This is the gold standard, and we generally recommend all buyers attempt to attain this from their lender. Some lenders don’t like to put files through this because it is expensive due to the labor of the underwriting team.
Typical closing time frame: 10-21 days