How to Buy a Home Part 2 – Pre-Qualification & Loan Approval

How to Buy a Home Part 2 – Pre-Qualification & Loan Approval

Broker | Owner | Mortgage Consultant
Josh Lewis
Published on October 6, 2020
What is the difference between a mortgage qualification and an approval?

How to Buy a Home Part 2 – Pre-Qualification & Loan Approval

Josh Lewis, BuyWise Mortgage, and Dustin Steeve, CEO, Lighthouse Escrow discuss how to become a homebuyer on this first part of seven about the basics of what you need to understand to become a homeowner.

Josh answers these questions:

  • What is the difference between pre-qualified and pre-approved?
  • What are the pitfalls of pre-approval?
  • How do you get pre-qualified?
  • What is a full TBD approval?
  • What is the importance of income qualifications?
  • Why is it important to be pre-qualified in a hot market?

What’s the difference between getting pre-qualified and forgive me I don’t remember the technical term for this, but basically getting yourself to a status where you have everything ready for underwriting, but you need the property?

Do you know what I’m talking about? It’s basically you become an all-cash buyer. What’s the name for that and what’s the difference between those two?

– So, it’s a full pre-approval and what we will actually, our lenders called a TBD Approval.

Where we can submit it all the way through to underwriting not only did you submit it to us and I’ve reviewed everything, we can send it on and have it go all the way through underwriting and the only thing we’re waiting for is property and an appraisal and a preliminary title report.

So we can do that and the big difference is pre-qual is “Hey, Dustin” you call me and we’re on the phone.

  • Okay cool, “How much money do you make?’
  • Okay, “Your wife works and she makes X.”
  • Okay, “And how much money do you guys have and where is it? Okay, “There’s this much in the 401 , “this much in the checking account.
  • “All right and then you guys have any debts? “
  • Okay, you have some student loans and a credit card “and an auto payment okay and it totals up to this “on the monthly payment.”

And we run the back of the napkin and we go, “Okay it looks like you should be fine.”

There’s a million potential pitfalls between just the back of the napkin numbers and actually seeing the documentation and through no fault of their own, buyers have no idea.

I ended up thankfully not doing the loan, one of my realtors referred the guy over and he thought he was just calling and interviewing lenders to see who’s going to give the lowest interest rate.

And he said, “I got this rate from this lender. “I got this rate from this lender” I said, “Okay, well can you tell me, “you know what, where are the down payment funds?” He’s like, “Why are you asking me these questions? “I just need to know what your rate is.”

I said, “has anyone actually gone through this process?”

“No, they know what my credit score is and I told them, I make this much money.”

Well, there’s a lot more going into it than that. And long story short, the guy had the money but the money was in like 17 different sources. Some of them acceptable, some of them not, the deal ended up closing late.

The lender who he did choose that had a really spectacular rate was thankfully pretty good and was able to pull it together at the last minute for him. But use that as an example, that buyers have no idea the potential pitfalls in there.

My job when I’m going through that preapproval interview, pre-call we’re going to go through some basics on the phone. My whole purpose with the first call is really just to answer your questions.

I want to get some basic information of what your goals and objectives are, so I know what we’re trying to pre-approve you for. I want to answer your questions and then I want to discuss what the next steps are to get that full preapproval.

Now, when I’m analyzing the documentation and going through the full preapproval I’m looking at it like an underwriter. I want to say, what is any and every potential pitfall that we could have in this file and make sure that we have answers or workarounds before we ever even get there.

You know, one of our sayings here at the office is we never close late, we never close ugly. And that requires doing things the right way asking some additional questions on the front end.

Sometimes asking for a document or two that we may not need, but it prevents a ton of stress on the backend. Buying a home for most people is the biggest financial transaction that they’ll ever be involved in and the mortgage is the biggest debt they’ll ever have.

Because of that, they’re going to be a tone of stress involved in that transaction. The best way for me to alleviate that stress for the borrower and for their realtor, is to do our job on the front end.

So that once I’ve gone through an analyzing done a full preapproval with all the documentation that we need, it’s a non event. The 30 day escrow or the 45 day escrow, it’s a non event.

We’re just connecting dots and checking boxes no actually…

– And that it’s something that you care about on the loan side. And that’s not something just something that we would care about on the escrow side. It actually makes a big difference for the agents. Why does it make a big difference for the agents? And how does it help buyers to go to TBD approval?

– Well, think about why it helps the agent. It helps the agent because what did I say one of their primary strengths are? For the most part agents are our people, people.

They’re out with you in their car showing them houses. So you have more of a relationship with your realtor than you do with me.

Very few of our clients come into the office most of them handle everything over the phone. We did your refinance never came into the office did everything online. And that’s very common even for people in our own town here.

I might see one out of 10 clients I bet if I went and ran the numbers, it’s more like one out of 20. So, when things get hairy or go sideways, it’s often times easier for the borrower to pick up the phone and talk to the realtor. So they’re taking a ton of that stress and being asked to relieve the stress solve problems that they didn’t create.

So it’s very important for a realtor, to have someone handling the loan that they know and trust and can not put them into situations that are difficult for them to resolve.

So the full TBD approval, we very rarely ever use it. When it comes down to is we get to a situation where I’m pretty sure that we can approve you, but not a hundred percent sure.

So I want an underwriter to put their stamp on and go, yes, that income is accurate. The lady with the 401 that she’s going to pull her money out of* we were actually working with her in mid-2019.

And prior to that, her husband had two strange jobs. And calculating the income was really really difficult to get an accurate number. I came up with three different ways that a reasonable person could calculate the income.

One of me qualified two of them that he didn’t.

So we sent it to a couple of different lenders for a TBD approval and one said, “No go pound sand.” This guy doesn’t qualify. And the other said, “Yeah, I agree with the way you did it.” So that’s the primary benefit for a really well-qualified borrower.

The kids I was talking to this morning that their parents are giving them the down payment of 800 credit scores. It’s low debt to income. They have a big down payment coming in a gift from the parents.

We don’t need to send that off to an underwriter. Underwriters are very, very busy right now. So most of our lenders aren’t even doing TBD approvals right now just cause they don’t have the capacity.

But we do have that ability when we have a weird situation that needs to be pre-flighted and run by an underwriter ahead of time.

– Yeah and what I’ve heard from listing agents as well as the more the further along you are in the lending process the more comfortable they feel pitching you to their client.

Cause keep in mind, especially in highly competitive markets which places like orange County are you’re gonna be in a multiple offer situation if you’re buying.

And you know, there are many people here who come in all-cash which means they’re not taking out a loan, they’re paying all cash to buy the house. That’s a safe bet in a lot of ways if you’re a listing agent, you’re looking to close the deal the market is uncertain, you don’t know where things are gonna go.

I mean we’re all pretty confident that housing prices are going to stay pretty high and the markets can remain healthy. But I mean, you know, God only knows. So if you’re a listing agent trying to get a commission, trying to sell the home so that you can please your your clients. Y

ou’re going to present to them, all of these different offers and you’re going to be saying, “hey, look, you know, this person over here,” “they’re all cash, this person over here is pre qualified.”

And there’s this other person that I’ve talked to their you know, talk to their lender I’ve talked to their real estate agent.

Sounds like they’re as good as all cash because they’ve basically done everything but getting the final stamp of approval from the underwriter I feel very confident about this person who’s basically all cash and this person who is all cash now, you know Mr. Agent are no, Mr. Client, excuse me Ms. Client, you can decide who you like more.

And there are strategies that we could get into you know, some other time about how to make your offer highly appealing but the better and more sounds your money looks, the more appealing you are to clients.

Is that something you’ve experienced as well?

No a thousand percent. What I always like to tell people when the market tanked between 2008, 2011 there weren’t a whole lot of loans to do. I made my money by flipping houses. We flipped over 40 homes during that timeframe.

And what I can say is as a seller of 40 homes, you start to get a different perspective on it. You see lots of offers come over, you see agents and loan officers that do a good and a very poor job of making their client’s offer look better or worse than it actually is.

So I always like to tell people there’s really only two things that a seller cares about. The first is how much money they’re going to net. So what that means is the top line doesn’t matter. It matters at the end of the day, what do they walk away from escrow?

So if I have 10 offers and they’re all equally well qualified I want the one that puts the most money in my pocket. But in the real world, very few offers are equal. So now I go, I rank them and what’s gonna put the most in my pocket to the least.

And then I go through and so, which is the most solid down to what I think is the least solid. So when I as a seller receive a package over from a realtor and it’s a faxed copy of a contract.

When most people haven’t used faxes for 10 or 15 years I start to rightfully or wrongfully wonder who I’m dealing with and what their technological capabilities are is a big portion of what we do on real estate end mortgage side.

And then when I see a preapproval letter that looks like someone pulled out a Microsoft Word and just typed up a letter or worse yet threw it in a typewriter. I have serious questions and reservations.

So when we send a package over to our agents, we have a very clean professional detailed preapproval letter. We put proof of your credit scores in there, We put the automated underwriting findings in there so that they can see exactly how strong the borrower’s qualified.

Most times agents with that are listing a property want proof of funds in there with the offer. So we’ll put the proof of funds.

So it’s all in one clean PDF package. And the agent just has their pretty PDF of their DocuSign offer and are pretty PDF of their approval and we always ask that they copy us on the email over which is why 99 times out of a hundred these are presented to the listing agent.

Copy us on that so that I have all of their contact info I’m going to follow up immediately with an email and probably with a BombBomb video in there and I’m gonna follow up with a phone call. An agent that gets 10 offers on a property probably doesn’t want to talk to me.

That’s why I put a video in there. I mean sometimes they do the good ones really do they want to know and want to understand who they’re going to be dealing with?

That’s one more element of reputational risk to them is who are they dealing with on the other side? Is this going to close on time?

Is it going to go the way they said it is? So we always want to reach out and try and have that communication.

Even if they won’t pick up the phone they’re going to get an email with a video of us walking through your qualifications, explaining why this will close on time exactly the way we’ve described it and set it up in the offer.

– Yeah see, so you and I just got pretty deep into the cog works of how this all works behind the scenes because for most buyers and sellers, they’re not going to see this right?

All they understand is, Oh, we submitted an offer but no, it’s actually there’s a lot more that goes into it. And there’s a lot of conversation that happens behind the scenes especially with the listing agent which listing is the term we use in our industry to describe the real estate agent who’s selling the home or who specifically is representing the sellers of the home.

So there’s a lot that goes on between the listing agent and their sellers. And so Josh what you described with the, you know, nicely packaged PDF, the BombBomb video. BombBomb is just a tool that we use in our industry to basically put a video in an email so that you can click in quickly watching a video.

It’s all you know, that’s all part of the presentation. That’s all part of what allows one buyer to stand out over and above another.

Some for you to keep about keep in mind as you think about wanting to buy a home and who you’re hiring for your lender and who you’re hiring for your real estate agent to represent you because how they represent you matters a whole lot.

Broker | Owner | Mortgage Consultant
Josh Lewis Broker | Owner | Mortgage Consultant
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(714) 916-5727

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