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Do you know your mortgage ABC's?

 

Home purchasers sometimes get into trouble because they are not clued into the sequence of steps involved in financing their purchase. These are qualification, pre-approval, approval, and lock.

 

Qualification

 

Qualification (or pre-qualification, as it is often called) is an opinion that your income, assets, and current debts qualify you for a loan of some specified amount. The opinion may come from a lender or a Realtor, or it may be your own based on your use of an affordability calculator. Whatever the source, the opinion does not take your credit into account, and no one is committed by it.

 

It used to be that Realtors did a lot of qualifications, often back-of-the-envelope affairs, so that they would not waste time looking for houses in a price range the buyer could not afford. Increasingly, they ask borrowers to become pre-approved by a lender because it is more reliable than a qualification, and lenders are willing to provide it free of charge as a way of stimulating business. Home sellers have also learned to ask potential buyers for a pre-approval.

 

Pre-Approval

 

Pre-approval is a conditional commitment to make a loan prior to the identification of a specific property. On a pre-approval, unlike a qualification, the lender verifies the information you provide and checks your credit. They will usually also run your information through an automated Underwriting system from FannieMae or FreddieMac to get an automated approval. A pre-approval will stipulate a loan amount or monthly payment and may include the loan type or the price.

 

The lender's commitment under a pre-approval is always conditional, but rarely are the conditions spelled out. Pre-approvals may have expiration dates and some considerable time may elapse before the borrower receiving a pre-approval comes back to convert it into an approval. During that period, things can happen that cause the lender to back off. For example, the borrower's credit deteriorates, or she loses her job. No one can reasonably expect a lender to approve a loan in those circumstances

Less clear-cut are the impacts of adverse market changes -- such as the tightening of underwriting requirements that occurred last year -- on outstanding pre-approvals. If a lender has pre-approved a loan and the market changes to the point where the same loan would not now be approvable,  the lender will be unable to honor the approval.  In the past, abrupt changes in underwriting rules occured infrequently. However, the underwriting rules are under scrutiny and changes are occuring as the financial markets adapt to the current industry situation.

 

Approval

 

Approval is a commitment by a lender to make a loan. Unlike a pre-approval, a specific property (along with its appraised value) is identified, and the loan details are spelled out. These include the type and purpose of the loan, down payment, and type of documentation. It will also include an interest rate, even though a rate is not firmly established until it is locked. The presumption underlying an approval is that the probability of closure is high -- much higher than with a pre-approval.

 

It is not 100 percent, however, because borrowers sometimes drop out, and sometimes one or more of the conditions that accompany the approval are not met. Approval letters contain "Prior to Doc" and "Prior to Funding" conditions, which are checklists of nitty-gritty details that must be completed before the final documents are drawn and before funds are disbursed. Sometimes, one of these details derails the train.

 

Lock

 Lock is a commitment by the lender to a specified price -- rate and points for a specific period of time, usually 30 days. Extended locks can be made, at a price, for up to 180 days. What happens if your loan isn’t going to close within the lock period? Some Lenders will allow a lock to be extended and others may not. When lock extensions are allowed they may be made for a day, a week or in some cases for up to 30 days. Ordinarily, lenders lock at the borrower's request and view the borrower as being committed as well. Since locking imposes a cost on lenders, some of them charge a nonrefundable fee which may be credited back to the borrower at closing.