Loan (pre) Approval vs. Loan Commitment

lending confusionRealtors work with lots of buyer’s that think the same way about getting a loan.

It comes up too often for me when I’m driving around with buyer’s.  We’ll be talking about a non-warrantable condo, or a property with title issues, or a building that’s not livable or even burning down.

The conversation goes like this:

Realtor  “…you wouldn’t be able to get a loan on that”

Buyer  “Oh,  well…. I’m already approved”

Buyer “My loan officer told me that I’m good, just to tell them when I find the right place and we’ll be done”

This may have more to do with ‘lender spin’, or it could be buyer not reading the documents in their entirety, but that buyer, in most cases, intentional or not, has been misled.

Pre-Approval

Getting Pre-Approved for a loan is the first step in getting the lending process going.  It’s usually a 10 minute phone call to a lender, in which basic information is discussed, like your name, social security number, date of birth, annual income, and length of employment.   While a lender can generally hand out a Pre-Approval Letter after  that discussion, you’re still a long way from banks parting with large sums of money.

What comes next?

Loan Application

The preliminary actions taken to get pre-approval are usually followed up with a commitment to one specific lender by completing a Mortgage Loan Application and providing funds for the homes APPRAISAL.  Some lenders credit the cost of the appraisal back to the buyer at closing, but before ordering the home appraisal, a deposit is typically required.  This is to prevent the home buyer from completing applications from multiple lenders then backing out.

Good lenders take care of preliminary details of processing the application and wait to order the appraisal until after the home buyer is satisfied with building inspections.

Underwriting

Once the appraisal is ordered and recieved by the lender, it is included, along with the application, W2/Income Verification, and any other letters required by the bank and sent to “underwriting”.  The underwriter is the person that looks at everything processed up to that point and will approve, reject, or conditionally approve the loan.  Most loans get some “conditions”, which is ultimately a list of things needed prior to fully approving the loan.  Examples of conditions might be letters of explanation from the appraiser, the borrower’s employer or the borrower themselves.  The underwriters want evidence that they are making the right decision, and often times they want additional documentation.

Loan Commitment

After all the conditions have been met and the application has been approved, lenders in the St Louis area provide a LOAN COMMITMENT to the Realtors.  This is simply a letter  showing that the bank is ready to move forward and make the loan.  The RESIDENTIAL SALE CONTRACT from the St Louis Association of Realtors has a “built in” contingency as part of the contract for loan commitment that gives the buyer the ability to terminate the contract if they are not able to get an approval letter from their bank by the ‘loan commitment date.’

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