What does it mean to be "pre-approved" for a loan?

Question

I hear this terminology all the time, but given all the different loan programs out there and all the requirements associated with mortgages, can anyone really be fully pre-approved?

Answer 1

Typically, a potential buyer that calls in for a pre-approval will go through a complete application by phone.  I will get as much information as I can in regards to employment, income, assets and credit history.  I will then usually pull a tri-merged credit report and review their credit history.  Then, based on the income and debt, I will look at their debt-to-income ratios and determine what the maximum loan amount they should apply for.

However, a pre-approval is only as good as the information a lender has.  For me, as a lender, I'm fairly stingy with my pre-approval letters.  If I have any questions in regards to their income or employment history, I will usually request they bring in their paystubs, tax returns and W2's to get a better look at things.  If there are any credit issues that need resolving, I may ask for documentation related to that.

Once I feel like I have enough information to make a good decision on their potential to be approved for a loan, I will then issue a pre-approval letter.

However, most every pre-approval letter will always have contingencis based on how much documentation I still need to review.  But at a minimum, they will always have "subject to's" like the following:

- Acceptable appraisal review by an underwriter
- No changes in employment or income
- Loan program guidelines changing without notice

So as you can see, a pre-approval is only as good as the information the lender has.