Mortgage Pre-Qualification vs. Pre-Approval

photo by Steve Spinks

Realtor.com quoted me in Mortgage Pre-Qualification vs. Pre-Approval: What’s the Difference? It opens,

When buying a home, cash is king, but most folks don’t have hundreds of thousands of dollars lying in the bank. Of course, that’s why obtaining a mortgage is such a crucial part of the process. And securing mortgage pre-qualification and pre-approval are important steps, assuring lenders that you’ll be able to afford payments.
However, pre-qualification and pre-approval are vastly different. How different? Some mortgage professionals believe one is virtually useless.

“I tell most people they can take that pre-qualification letter and throw it in the trash,” says Patty Arvielo, a mortgage banker and president and founder of New American Funding, in Tustin, CA. “It doesn’t mean much.”

What is mortgage pre-qualification?

Pre-qualification means that a lender has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount.

But here’s the rub: Most often, the pre-qualification letter is an approximation—not a promise—based solely on the information you give the lender and its evaluation of your financial prospects.

“The analysis is based on the information that you have provided,” says David Reiss, a professor at the Brooklyn Law School and a real estate law expert. “It may not take into account your current credit report, and it does not look past the statements you have made about your income, assets, and liabilities.”

A pre-qualification is merely a financial snapshot that gives you an idea of the mortgage you might qualify for.

“It can be helpful if you are completely unaware what your current financial position will support regarding a mortgage amount,” says Kyle Winkfield, managing partner of O’Dell, Winkfield, Roseman, and Shipp, in Washington, DC. “It certainly helps if you are just beginning the process of looking to buy a house.”

Common Mortgage Myths

image by Nevit Dilmen

Newsday quoted me in Don’t Fall For These 4 Common Mortgage Myths. It reads,

With the spring home buying season just around the corner, it’s a good time to separate fiction from fact.

Here are four common mortgage myths.

MythHome buyers must put down 20 percent.

Fact“While that may have been true a long time ago, there are a number of alternatives. Federal Housing Administration-insured loans can have 3.5 percent down payments. Fannie Mae and Freddie Mac both have programs with 3 percent down payments. One major lender has come up with a program with a 1 percent-down mortgage, but there are some significant restrictions on who qualifies for that program,” says David Reiss, a law professor specializing in real estate at Brooklyn Law School.

MythMy bank knows me, loves me and will give me a deal.

Fact“Mortgage lending is regulated by nationwide underwriting standards that all lenders must follow. Since virtually all lenders obtain money to lend from the secondary mortgage markets, the mortgage rate one can obtain will be virtually the same regardless of the lender chosen,” says Warren Goldberg, president of Mortgage Wealth Advisors in Plainview.

MythPrequalification means you’re approved and will get the loan.

Fact“Pre-qualification is not a binding agreement. Lenders may require additional information before issuing the loan. Pre-qualification gives you an idea of how much you can borrow before you start looking at homes and shows sellers that you’re committed and can afford the home,” says Bob Donovan, Bank of America’s divisional sales executive for the metropolitan region in Manhattan.

MythI’ll close in 30 days.

Fact: “That’s rare now. The turnaround from application to closing is about 50 days,” says Sam Heskel, CEO of Nadlan Valuation in Brooklyn.

 

Reiss on Buying a Home

Mainstreet.com quoted me in Potential Homeowners Should Seek Counseling Before Making First Purchase. It reads, in part,

Many consumers have made buying their first home less of a daunting task by seeking housing counseling from a non-profit organization.

In 2014, more than 73,000 people received housing counseling from the National Foundation for Credit Counseling’s member agencies, making it the highest volume experienced during the past five years. The renewed interest in housing counseling could be an indicator that many people are considering home ownership as an affordable option.

*     *     *

Homeowners should look at a range of mortgages before committing to one since the typical American homeowner moves every seven years, said David Reiss, professor of law at the Brooklyn Law School in N.Y. For example, obtaining a “relatively expensive 30-year fixed rate mortgage may not make sense,” he said, if you can save a lot in monthly payments with an adjustable rate mortgage (ARM).

ARMs have a certain period of time where the interest rate remains the same, such as 84 months for a 7/1 ARM or 120 months for a 10/1 ARM and then it adjusts each year for the remainder of the mortgage.

“This might be particularly true for very young households or for empty nesters, both of whom may have different needs in five or ten years,” Reiss said. “It is hard to predict where interest rates and prices are going, so holding off on buying when it seems like the right time to do so for your personal situation is risky.”