Mortgage pre-approval vs. pre-underwriting

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What are the pros and cons of pre-approval and pre-underwriting?

If you’re searching for a home, you’ve probably heard about getting pre-approved for a mortgage. This is when a mortgage lender is willing to say they’ll approve your loan, up to a certain amount.  

Because of bidding wars, buyers are looking for any and all kinds of opportunities to strengthen their offer. Buyers want to show up with something as close to a sure thing as possible when making offers. But there’s an even stronger kind of guarantee: meet the pre-underwritten mortgage.

Some extra time and added steps may give you some more clout when buying your home. But nothing is a sure thing in real estate. Homebuyers need to do their homework when trying to get a mortgage pre-underwritten.

What you’ll learn in this article

  • While pre-approval is always necessary to make offers, pre-underwriting is an optional upgrade
  • A pre-approval isn’t more guaranteed than a pre-qualification even though it’s more detailed
  • Pre-underwriting requires a deep dive into your finances before you even make an offer on a home
  • Pre-underwriting can hold you back from making offers until the process is complete
  • Every buyer must go through the underwriting process. The question comes down to whether you prefer to do it before or after an offer is made
  • Pre-underwriting can be beneficial if you’re buying in a competitive market with bidding wars
  • Not all lenders offer pre-underwriting

What is pre-qualification?

A loan pre-qualification is a step on the way to pre-approval. Pre-qualifications are part of the process lenders use to decide what kind of guarantee they can give you. After you’re  pre-qualified, now is the time to get either pre-approved or pre-underwritten. 

Pre-qualification is not a requirement for pre-approval or pre-underwriting. But some people like to request pre-qualifications early on in the house-hunting process to get an idea of how much home they can afford.

The big benefit to doing a pre-qualification prior to a pre-approval is that a pre-qualification is a “soft pull.” That means it won’t harm your credit score. That’s a big plus when every point impacts your interest rate.

Lenders generally only need the following for a pre-qualification:

  • Your monthly income
  • An estimate of your monthly debts
  • How much you have ready for a down payment

The number your lender provides for your pre-qualification amount is an estimate based on some assumptions about your finances. While your pre-qualification letter provides a ballpark figure for what a lender will generally be willing to give you, it’s not set in stone.

Most real estate agents won’t work with buyers until they show up with actual pre-approval letters in hand.

What does it mean to get a pre-approval?

A pre-qualification letter only provides a number that a lender would be likely to lend to you, but a pre-approval actually outlines the terms of a hypothetical offer. Details like your allowable purchase price, interest rate, and lending fees are baked into the letter to give you a realistic look at what a home purchase means for your finances.

A pre-approval letter is the traditional gold standard for buyers. Your pre-approval letter is a prerequisite for being able to shop for houses with a real estate agent. It’s simply not in the best interest of an agent to work with someone who doesn’t show up with this letter in hand because you could be wasting their time if your finances don’t match your desires.

Your pre-approval letter is a document from a lender laying out the loan amount they’d tentatively lend to you for your home purchase. It’s also your dress rehearsal for actually getting approved. Your lender will go through a similar process for approving an actual loan.

real estate agent discussing in front of his client
Pre-qualifying, pre-approval and pre-underwriting are all options to secure financing when making a home offer

What are the downsides to getting pre-approved for a mortgage?

A pre-approval almost always requires a hard pull on your credit.

The slight hit your credit takes isn’t enough to hurt your chances of getting a loan, but it’s important to avoid multiple pulls for pre-approvals.

The good news is that your credit report bundles all your mortgage inquiries that happen within a short window into a single inquiry.

You typically have a safe window of up to 45 days for collecting quotes without being penalized. Work with a lender you want to stick with to reduce credit pulls.

Here’s what lenders typically ask for when conducting loan pre-approvals:

  • State and federal tax returns (W-2s and 1099s) going back two years
  • Bank statements going back 60 days
  • Statements from retirement and brokerage accounts going back two months
  • Totals for monthly debt payments
  • Proof of rent payment going back 12 months
  • Court papers related to child support and alimony payments
  • Documents pertaining to any past bankruptcies or foreclosures

Pre-approval letters have expiration dates. A lender’s letter is usually valid for a window lasting 30, 60, or 90 days. 

What is mortgage underwriting?

Think of underwriting as last step to actually getting a mortgage loan. The truth is that you’re barely halfway there when you get the pre-approval letter in your hands. The underwriting process is still coming.

What happens during the underwriting process? Once you submit all of your paperwork for a loan approval, your loan enters the underwriting phase. Mortgage companies assign every loan application to its very own underwriter. This is when a lender does a deep dive into your finances.

Here’s what underwriters look at: 

  • Credit score
  • Employment history
  • Savings
  • The risk level of a potential loan

The underwriting process is actually where a lot of the delays of the loan-approval process occur. Underwriters are following strict guidelines when determining each applicant’s eligibility for a loan. They frequently have questions that create a conversation between the borrower and the loan officer.

What can you expect during underwriting? 

Don’t be alarmed if an underwriter wants to hear more about a credit card that was closed, a sudden job change, or an outstanding medical bill. The good news is that a hiccup during the underwriting process doesn’t necessarily mean that the underwriter doesn’t like what they see.

Underwriters sometimes just need more information, some clarification, or access to documents that are missing from your loan packet.

What is pre-underwriting?

The reason why underwriting is such a nail-biting experience is that it happens while the stakes are high. If you’re in the underwriting phase, there’s a good chance that you’ve fallen in love with a home. You’re eager to finalize all the paperwork as quickly as possible.

Is there a way to preload all the work of the underwriting process?

This is where pre-underwriting comes into the picture. Pre-underwriting means that your lender will put your loan application through the scrutiny of the underwriting process before you’re under contract for a house. An underwriter will do all of the work that usually comes after an offer is accepted before you even start looking at homes.

man sitting on couch using MacBook
The mortgage underwriting process can take a long time but is one of the best types of guarantees for home buyers

What is the benefit of pre-underwriting over pre-approval?

The biggest benefit of pre-underwriting vs pre-approval is that sellers will know you’re a safe bet. In fact, you’re essentially showing up to the table with proof that you’ll make it to closing without any surprises. That’s not something that many buyers can say.

Sellers know that every extra week they stay in a home equals more costs on their side.

Everyone wants a sure thing in the buying process. That’s why pre-underwriting can be a great buyer’s tool in a competitive market. In fact, it could be your ticket to winning a bidding war in a market where homes get multiple offers. Showing up with a pre-underwriting letter places you in a similar spot as cash buyers in the eyes of sellers.

Does that mean that pre-underwriting is something that everyone should do? Not necessarily. This step isn’t usually necessary if you’re not searching for homes in an ultra-competitive market. However, buyers in hot markets might want to consider it as a way to stand out from the crowd of pre-approved buyers.

The biggest downside to getting pre-underwritten before making an offer on a home is that it takes time.

You may need to cool your heels with home searching for a few weeks while the underwriting process takes place. There are ways to speed up the process, though. Flyhomes helps you compete, specifically, by offering a super fast pre-underwriting process that can help you close on a home in as little as 10 days. 

Pre-underwriting is also a relatively new service. As a result, you may not be able to find a local lender offering this service just yet.

Ultimately, pre-underwriting is a guarantee. You’re showing up with almost 100-percent certainty that your home offer will actually be successfully financed. It can be a great strategy for getting your bid approved over other offers in a tight market. However, it’s not necessary to get pre-underwritten in order to get offers accepted.

Wrapping it up: should you get pre-approved or pre-underwritten for a mortgage loan?

Should you ask your lender about pre-underwriting? It’s not completely necessary if you’re confident that your pre-approval letter is an accurate representation of your ability to qualify for a home loan.

A pre-approval letter is still the gold standard for being taken seriously by both sellers and agents.

That doesn’t mean that pre-underwriting shouldn’t be on your radar. Consider using this tactic if you’re searching in an ultra-tight market.

Pre-underwriting could be a great asset to have in your back pocket if you notice that homes in your market are being scooped up in a flash. Ask your agent about the likelihood of a bidding war based on the property types and neighborhoods you’re focusing on in your home search.

All the same rules apply for success in house hunting whether you choose to go with pre-approval or pre-underwriting. First, make sure your down payment is ready to go. Next, ensure that you’re ready to supply your lender with accurate, current documentation regarding employment, taxes, debt, bank statements, and any other relevant aspects of your financial life. The key to a successful home closing is being prepared.

FAQs

Is pre-approval the same as underwriting?

No! While the processes are similar, they are two different strategies to make offers. Pre-approval is a process where a lender reviews your financial information to provide a letter stating an amount that you are likely to be approved for when you formally apply for a mortgage. Underwriting is the process that lenders use to vet your eligibility after you’ve submitted your loan application. An underwriter will review all of your financial information to assess your risk level before approving you for a loan amount. In some cases, lenders will permit you to use an option called pre-underwriting that allows you to go through the rigorous underwriting process before making offers.

How long does underwriting take for pre-approval?

There is no concrete answer. It’s very common for initial underwriting to be completed in just three to five days after your loan file is submitted. However, underwriting can take up to a month if you’re dealing with discrepancies or missing documents.

Which is better: pre-approval or pre-qualification?

While pre-qualification helps you to have an idea of how much home you can afford, it does little in terms of getting your offers taken seriously. Pre-approval is the standard requirement for submitting offers to sellers through an agent.

Can you buy a house for less than your pre-approval?

Absolutely! A loan pre-approval letter simply states the maximum loan size that a lender is willing to give you for a home purchase. Buyers are under no obligation to accept the full pre-approval amount.

Can your mortgage be denied after pre-approval?

Yes, it is possible for your mortgage to be denied after you receive a pre-approval letter. A pre-approval letter is not a guarantee. A pre-approval simply states the amount that a lender is likely to lend you based on the financial information you’ve provided. The actual loan-approval process includes an underwriting stage to closely examine your financial records.

Some common causes of denials after pre-approval include:

  • Something negative in your credit report
  • A drop in income
  • Rising debt levels
  • A change in lending requirements on behalf of the lender

The goal is to avoid making any big changes to your lifestyle or finances leading up to your closing date. Avoid changing jobs, making a big withdrawal from your savings, moving assets, taking on other debt, or using up savings if you’re in line to close on a home.

Can your loan be denied at closing?

While it’s very rare for this to happen, it is possible for a loan to be denied at closing. The most common reason for loan denial on closing day is a lack of closing funds. This can happen if a buyer is relying on funds from the sale of their current home to fund closing on their new home. If the deal falls through, the buyer may not be able to show up at closing with the funds needed for closing costs. It’s also possible for an egregious last-minute change to your credit report to cause a lender to pull back approval.

What information will the underwriter review?

An underwriter’s job is to assess your risk to the lender based on your ability to pay off the amount that you’re borrowing.

Factors that are reviewed during the underwriting process include:

  • Recent employment
  • Debt
  • Income
  • Debt-to-income (DTI) ratio
  • Savings accounts
  • Checking accounts
  • IRA and retirement accounts
  • Recent tax returns
  • Outbound alimony or child support
  • Bankruptcies or foreclosures

Are there any cons to pre-underwriting?

Not usually. The biggest downside is that you will need to wait up to a few weeks to get your underwriting report before you can begin seriously browsing for properties. Sometimes a hard inquiry on your credit may affect your loan rate.

Which pre-approval should I get?

A standard pre-approval level is the bare minimum required to begin making offers on homes. If you have a pre-qualification letter, you’ll need to return to your lender to go through the pre-approval process. If you’re in a highly competitive market where bidding wars are common, consider going through pre-underwriting to be able to make more competitive offers.

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