We are continuing my series, “Understanding Financing,” with this video on the pre-approval process for a mortgage. What is a pre-approval and why should you get one? I interview Rich Godbout of Caliber Home Loans.
Hannah: Hey everybody! I am here today with Rich Godbout of Caliber Home Loans. I have known Rich my entire real estate career and so that’s why I have asked him to come in today to talk to you guys. I trust him with my clients. He is an expert. He knows how to work the mortgage process, all the loan products. And so today we are going to be talking a little bit about some of the first initial questions people have. So thanks for coming.
Rich: Yeah. Thanks for having me. I’ve been doing this a long time, we see eye-to-eye. It is really rewarding helping people into their homes and to see the smiles on their face at the closing table. Your video series is going to help people do that and enjoy the process the whole time and avoid these pitfalls that a lot of home buyers make and the mistakes as they go through the process. So, congratulations. This is great! I love that you’re doing this.
Hannah: That’s great. Yeah I remember how excited I was when I got my first house. I just wanted to get in, start painting and decorating. But avoiding those pitfalls upfront is going to be the biggest thing that they can do toward helping them achieve that goal. And so I was hoping we could start here by talking about what it means to get pre-approved for a mortgage and then also what’s the difference between a pre-approval and a pre-qualification letter?
Rich: Sure. So, the number one recommendation in the industry, whether you’re a CPA, Financial Planner, Loan Officer, or Real Estate Agent, is get pre-approved. So everyone wants what’s best for the client. But what they don’t tell you is there is actually a scale, a spectrum of levels of pre-approvals. And not every pre-approval is created equal. So, our goal is to make sure people have the best experience possible and that they have a strong pre-approval letter so they avoid the pitfalls that we’re about to talk about. This is normally where the train starts to derail. And it’s right at the beginning. So, let’s talk about the strength of the different pre-approvals.
You’ve got the weak side of the scale and the strong side of the scale. On the weak side, it’s the pre-qualification. This is just basic information that you’ve given to the lender about you. You have given them your income, your assets. Maybe you gave them your last name. Or maybe you didn’t. It’s just basic information. Income, assets, and idea of what your credit score is. And, so the lender is taking an educated guess and saying based off of this information, you should be pre-qualified to purchase a home at this amount and have a loan amount at this amount. But there is tons of risk there, right? The income hasn’t been verified. The credit hasn’t been verified. Nothing has been reviewed. It’s really just an educated guess. The saying in the industry is a pre-qualification is not worth the paper it’s written on. And that’s the truth because of all this risk. As a home-buyer and as agents, we advise people to avoid that risk.
So, you go to the next level up. That’s a pre-approval. So, now, in this situation you’ve actually let a loan officer review, you’ve provided the supporting documents. The loan officer has reviewed the income, the assets, the credit report. Probably reviewed your rental and employment history. So, if you’ve all those pieces together, now a loan officer can, with confidence, say: Okay, you should be pre-approved for this amount. I say, with confidence, not all loan officers are created equal and there are honest mistakes that are made. There’re still some risk there because ultimately for you to get to the closing table, you have to have an underwriter sign off on the loan. And, that’s the missing piece. A lot of home-buyers don’t understand that and don’t know that; there are agents that don’t know that. But, you’ve got to get the underwriter to sign off. So, there’s still some risk and uncertainty there.
So, the next level would be, take the pre-approval, take all that information that the loan officer has reviewed and run it through an automated underwriting engine. It spits back out: “Hey, yeah, this information meets the lending guidelines for this product. And, that’s a stronger letter. That’s great to have. You still need an underwriter to ultimately sign off on that piece. But, at least, you’ve got the automated underwriting engine approval. So, the truth is that most people are operating on out there shopping for homes with that pre-qualification or that lender pre-approval letter – so they can do better.
And so the strongest letter is now you’ve had the underwriter sign off and actually review the documents. And that’s really what everyone should want for their clients because that’s the strongest letter you can have. It gives you full confidence that you’re going to reach the closing table. And there’s just a lot of risk off your shoulders; I can actually feel it when I talk about it because we’ve lived the pre-qual, we’ve lived the pre-approval. But once you have the full underwrite, you know that your clients are going to get to the table and that’s the best experience for everyone involved, seller, the listing agent, the buyer’s agent, the buyers, the loan officer; it’s just a better experience and that’s what we want for everybody. And that’s what they should be doing.
Hannah: And from an agent perspective, when you’re presenting an offer to a listing agent, a lot times in our area, people don’t even want to see offers with pre-qualifications because they that they have not been verified yet. So, just the strength of a pre-approval letter…
Rich: I see it all the time and when something goes awry in the loan process, it’s typically related to that initial process. It’s not that challenges don’t come up, they do; there are surprises. But, if you’ve done a full pre-approval and you’ve done an underwritten pre-approval, you’re able to navigate to the closing table a lot easier than if you didn’t.
Hannah: So, this sounds like it’s a very time consuming process. Can you give buyers who’ve never gone through this before a sense of how long that takes?
Rich: Yes, it’s actually not a time consuming process, I think that it’s just because I was wordy. But it’s actually pretty simple. If you have your supporting documents upfront… You’ve got to do your homework! No one likes doing homework but you go to do some homework here. Get your documents together, present it to the lender. The lender gets to review it. We know what we’re looking at and as we’re putting it together, we can easily submit into automated underwriting. The extra step will be how soon an underwriter can look at it. So, you give yourself a couple of days for an underwrite to happen. But this initial part is really how busy is your loan officer. That’s what it’s about.
Hannah: Okay. And what about those documents you referenced? What are the kind of documents that a buyer is going to need to have ready?
Rich: So, a rule of thumb in the industry. You don’t need these documents for all loans, but the rule of thumb is – two year’s tax returns, two year’s W2’s, two month’s bank statements, and one month of pay checks. That should be enough information to provide to the lender so that they can structure your loan. They’re going to do an interview process – your short-term, long-term goals – and see which loan you’re looking for and which one works best for you and once they’ve done that, you can determine do we really need the tax returns, did I need the W2’s. So, gather it, have it, give to your loan officer. They’ll use what they need. Just be prepared. That’s the rule of thumb. Do your homework.
Hannah: We talked a little bit about what the pre-approval process looks like but why should somebody get pre-approved?
Rich: The obvious answer – You need to know what you can afford. You need to know what homes you’re going to be looking at, because you are going to be online searching, you’re going to fall in love with the houses, you’re going to see everything that, you know, how am I going to paint it? And you need to be emotionally tied to homes that are within your purchase range. So, that’s the easy one.
The other one we talked about is this different level of strength of a pre-approval. The house that you fall in love with is also the house that somebody else falls in love with. So, don’t you want the advantage over the other buyers? If the other buyers are out there shopping with a pre-qual or a basic pre-approval and you come to the table with an underwritten pre-approval, I mean, you’re the real estate agent, you tell me which one is the stronger offer?
Hannah: Exactly. In our area, we know this is very competitive. We see houses that have multiple offers, even 16 offers at a time. There are some neighborhoods where you are going to be competing and sometimes even with cash buyers. So, you need to come in with a strongest letter that you can have.
Rich: If you are presenting offers to your seller, you’re going to say, “This one is done.” The loan officer has called me, they’ve confirmed they’ve already been through underwriting. That’s more of a sure thing.
Hannah: Certainly the listing agent is going to call your lender and they’re going to verify did this lender, in fact, write you a letter and have they looked at your documents? They’re going to want to know these things. They’re going to want to be able to tell their client this person looks to be financially capable of purchasing this house.
Rich: And there’s only so much that the lender can share but we can confidently say these are the steps we’ve done. They’re good to go.
We want everyone to have the best experience possible. Just you do yourself a favor, do the homework, get the strongest approval letter you can.
Hannah: Exactly. And then on top of that there are some costs, even if you are selected. If you don’t know whether or not you can get to the table, you probably already spent money on your home inspector, your termite inspection, your appraisal, and this can be over $1000 worth of expenses that if you don’t go to the table and close on your loan, you’re not going to be getting that money back. Knowing that you can close helps you feel better about spending that money.
Rich: Yeah. You don’t want an appraisal on the home that you’re not able to have.
Hannah: So, moving on from that, let’s say somebody is scared to come talk to you. And they say: “I’m not sure if I’m going to qualify. I’m too scared to call the lender.” What would you say to them?
Rich: We don’t bite! Look – you need to have a professional help guide it through. I know, there’s a lot of information out there and everyone thinks that they’re going to put it all together by searching the internet. There is a lot of information out there and that’s great, but ultimately you need a professional to help you through. And we’re not there to judge you. Everyone says, “Oh, I’m going to be judged” and, you know, no. We’re going to take a snapshot of where you are today and we’re going to look at it. A lot of people are actually surprised, the people that are scared they may not qualify, but the reality is there’s flexibility in the lending products out there. And, so, people do qualify when they don’t think they can, but you got to start, you got to trust somebody. So, ask the agent you work with that, hopefully it’s Hannah, but ask the agent you’re working with and get a referral of a lender that they trust, and then review your situation with that lender. They’ll tell you where you are today and if you can’t buy right now, they’ll map out the plan for you buying in the future. Whether its two months down the road, four months, six months, two years down the road. That’s what we do. Here you are today. Here’s how we can get you to the next step. We’re all there to help. Get the judgment out. You got to do it. Have your homework together. Make it easy on everybody, make it easy on yourself and just do it.
Hannah: Exactly. But what if this person, it’s not that they’re not sure if they’re going to qualify, they know they have a credit issue or something, like a short sale, that they’ve been through in the past and they’re worried about how those things are going to affect their ability.
Rich: Right. So, same thing. On the mortgage side, we do this all day, every day. We know the guidelines; we know how to navigate through and within the guidelines. So, if you have a known issue, that’s fine. Don’t hold things in. You want to be open with the lender. Just be transparent. Here’s what it is. What do you see? How can we make this happen? And there are products that people can move forward even if they have a short sale. That might not be what they want to do. They might want to wait until they have a seasoning opportunity to buy down the road, but map it out. Get it mapped out so they know and it’s not this unknown of, “I’m going to wait till this is taken care of on my credit and then I’ll come and talk to the lender.” Do it early, take care of it early. Speaking of credit, it takes a while to get things off of your credit and fixed. Credit repair companies will say anywhere from, they’ll say two months, but it could be four to six months. So you got to allow that much time for things to be taken care of if you’re repairing credit. So, start the process early, let a lender guide you through it and that way you’re in a better position down the road when it’s time to actually buy.
Hannah: What about people who say, I don’t want to get pre-approved because I think that is going to ding my credit and lower my score?
Rich: It’s always credit. Straight from the credit bureaus, let’s say somebody has already spoken to a lender so they’ve already had their credit pulled out. I don’t want a lot of people pulling your credit. I get that. But the reality is if you’ve pulled your credit, you have 30 days. In that 30-days window, other lenders can pull your credit and it’s not going to negatively impact your score. Now, that first credit pull may have affected your score 2-3 points. But, you have to do it! You have to get the pre-approval to avoid the uncertainty, the weak pre-qual letter. You get the credit pulled. So, you might as well do it, find the lender you trust, who is referred to you, and let them pull the credit and structure that loan consultation for your short and long-term goals to figure out what it’s going to be. But let’s them look at the credit.
Hannah: Great. Well, I hope that this has really helped some people see what some of these pitfalls are going to be and how to avoid them. A lot this is really avoidable if you find your lender, find your Realtor early in the process. And be upfront about what your situation is, what your goals are, what you’re trying to achieve. Have your documents together and you can really avoid a lot of the financial pitfalls that a lot of people tend to fall into.
Rich: Enjoy it! It’s a great experience.
Hannah: It is!
Rich: It really should be. People try to take shortcuts… Enjoy it. Do the right steps, do it early and you’ll have much better process, a much better experience.
Hannah: Exactly. And at the end of this, you get the house you want with the loan product that’s going to help you afford what you want and meet your goals.
So, I want to thank you for coming and doing this video. I hope everybody enjoyed it.
Rich: Yeah. Thanks, Hannah. You’re helping the world.
