Step 3. Pre-approval Application.

The first step in the process of financing a home is to be Pre-Qualified.  The purpose of doing that is to see if there are any problems before putting any funds at risk.  Home inspections, an appraisal, good faith deposit and possibly other expenses are paid in advance.  Think of the Pre-Qualification process as a safety valve that protects those funds.  If there is a problem(s) it is better to discover it BEFORE putting up hard earned money.

If credit issues are identified in the original credit report there is time to address them if the Pre-Qual procedure is done early enough. 

If everything looks good after the first step the next step is to gather all of the support documents that will be needed to run the loan application through an Automated Underwriting System (AUS).  Some loan officers will run AUS without reviewing the support documents, obviously not a good move.  The findings are not valid if the data in the application doesn’t match exactly the information on the support documents.

Once all of the support documents have been reviewed and checked against the information furnished during the first step it is time for Step 3.    

Step 3 Pre-Approval

It should be clear by now there is a very big difference between being Pre-Qualified and Pre-Approved.  The first is, “suppose this, this and this are true” while the other is “based on verified facts.”  

I hope the steps are beginning to make sense.  It’s all about the money!  Protect your money; take all of the steps in order.  If you skip any step the risk of failure increases dramatically. 

Over the years many of my loan applicants have missed their income in Step 1 by as much as 30%.  If we had not checked Step 1 against Step 2 they would have crashed and burned.  That means they would have made an offer on a home they couldn’t afford.  Most loan officers confronted with such a problem would just deny the loan application but not until some of the buyer’s money was wasted.  The problem would not be discovered until it was too late. 

Buying a home isn’t done in a vacuum, but much of the lending industry believes that is true.  The buyer decides how the financing is structured, the same as the rest of their debt structure. Paying off a credit card, buying down an interest rate or changing the loan type are just three examples of moves that can solve an income to debt ratio. 

But if you have already made an offer on a home it is not so easy to change directions mid-stream.  It is important to plan first and then act, not the other way around.

Okay, after taking Step 3 you have a Pre-Approval letter in hand, time to buy a home!