Understanding the Pre-qualifications & Pre-Approval

Knowing the difference between a prequalification (also referred as a pre-qual) and an approval can make all the difference in your transaction to successful closing. It's been my experience that if you rely on a pre-qual , your setting yourself up for the unknown to happen.

Most lenders will provide you with a basic pre-qualification for a prospective buyer, however this is usually based on information supplied by the prospective buyer, which may not have been verified. The problem with pre-quals, is that each loan takes on a life of it's own. As there are many variables that can happen just on the sheer information that the borrower is supplying.

As an example a buyer prospect indicates his or her income is $80,000 per year. Based on that information, their income may be $80,000 per year, however, by the time an underwriter reviews the file, it may contain information that was omitted by an error in calculation or material facts may not have been known at the time of initial interview.

The income used in the pre-qualification may not be accurate or is not appropriate in the eyes of the lender or investor guidelines. The income used may not have been accurate, as certain various factors may have been viewed differently.

Income less than 24 months is averaged out to get a good picture of the income stream. A person who worked a lot of overtime this year, but last years income was less does not reflect a true picture of the last 24 months. Underwriters will generally view this as short-lived overtime and may average the last 24 months of income to meet their investor's guidelines, unless there is a specific contract of guaranteed overtime.

In plain English, if your income was less in the previous years, lets say $70,000 for 12 months and this past 12 months reflected $80,000, would be an average of $75,000 per year or a loss of $5,000 per year in income. A person who is self-employed may have expenses for labor and cost of goods that could conceivably lower their net income which is deducted from the gross income. A person receiving income from being self-employed may be treated differently than a regular W2 wage earner. Other factors can affect the income stream, such as alimony and child support issues.

Debts may be treated differently, such as a person who has less than 10 months remaining on an installment loan, could or could not be used in the calculation with respect to the debt to income ratio. If the installment loan is of significant proportion, it may be disallowed because of it's size. A lease payment may not be counted if less than 24 months and there is another vehicle available.

Carlos R. Arvizu Sr. pronounced R.V. Zoo Real Estate Proker/Trainer

Prudential California Realty/TheMulhearn Group

562-755-3856