It’s early Saturday morning and Tom and Susan are celebrating. You see, their real estate agent just called to let them know that the seller accepted their offer. Tom and Susan were finally about to become homeowners.

Their realtor indicated that the seller decided to accept their offer over similar offers simply because they were pre-approved for a loan. Tom and Susan thanked their agent since it was her idea to obtain a pre-approval prior to submitting an offer. Excited, they immediately called family and friends with the good news.

About three weeks later, Tom and Susan received a different telephone call. This time it was the loan officer at their bank. He was calling to let them know that there was a problem with their mortgage: the loan was denied final approval by his underwriting department. The reason was insufficient income.

Whether you’re looking to buy your first home, trading up to a larger home or buying investment properties, obtaining a written Full-Approval from a lender is an excellent way to begin the process of purchasing real estate. Just make sure you’re dealing with a lender or real estate professional that knows the difference.

As you can imagine Tom and Susan were not only devastated by the news, but confused as well. How could the same lender that issued a pre-approval now be turning them down?

Unfortunately this scenario happens over and over within the real estate community. In fact, the New York Department of Banking recently issued a statement citing that a New York based lender issued 14,000 pre-approvals over the past 2 years and only honored 450 of them with final commitments.

HOW COULD THIS BE POSSIBLE? HERE’S HOW:

To begin, there is a fundamental problem within the real estate community with the use of the term “pre-approved” mortgage.

By itself, the word “pre-approved” gives the impression that a decision has already been made about the applicant. And since most of us have at some point received “pre-approved” letters in the mail from credit card companies, the terminology appears familiar.

The problem is that quite often a “pre-approved” mortgage, like “pre-approved” credit cards, is nothing more than a “pre-qualification.”

By definition, a pre-qualification is simply a cursory look at an applicant’s financial picture including credit, income, assets and liability. That is, a loan officer or a bank representative reviews an applicant’s information to determine if they would qualify for a loan.

A pre-approval is completely different. When a lender pre-approves you for a mortgage, it should mean that the decision maker or loan underwriter has actually reviewed your documentation, tested it against their underwriting guidelines and if satisfactory, issue you a statement of approval subject in most cases to minor conditions and a satisfactory property appraisal. At American United, we call this our “Full Approval”.

The clear distinction between the two is that in the case of a Full-Approval, the loan has been reviewed by the decision maker (the underwriter) and not simply by the loan officer. Regardless of the loan officer’s experience, he or she is not an underwriter. So in short, if your lenders pre-approval means “pre” underwriting, then all you really have is a fancy pre-qualification that may place your purchase at risk.

Whether you’re looking to buy your first home, trading up to a larger home or buying investment properties, obtaining a written Full-Approval from a lender is an excellent way to begin the process of purchasing real estate. Just make sure you’re dealing with a lender or real estate professional that knows the difference.

To obtain a Full Approval through American United, visit our Approval First program at:  Approval First

This article was provided by Joe Farella, industry expert and author of the award winning book, “Insider Secrets to Home Buying Success”.  Mr. Farella is also the Executive Vice President of American United Mortgage Corporation, Scotch Plains, NJ.  For questions about your New Jersey home purchase, feel free to call Joe at 908.322.5423 or via email:  joe@americanunited.com