Preapproval, prequalification, automated underwriting, fully underwritten preapproval — all familiar terms, but do you know what they really mean? What impact do they have on your client’s loan process or chances for approval? As a seller, what level of assurance does a lender letter offer?

In our two-part series, “All Preapprovals Are Not the Same,” we’re breaking down these commonly used terms and explaining the advantages and disadvantages of each.

Let’s start by clarifying who can make an underwriting decision. In most cases, a lender’s designated underwriter will ultimately be making the credit decisions. They rely on the same tools and guidelines that a loan officer does.

The major difference is that only an individual deemed to have credit authority can provide a loan approval. This will play a major role in understanding the various terms and levels of approval. We break it down here:

• Preapproval or prequalification – In most cases these terms are used to describe the same thing — that some level of due diligence or review has been completed on the borrower by the loan officer.

• Automated underwriting – The utilization of the risk assessment tools provided by Freddie Mac or Fannie Mae (which provide the backdrop for about 80% of all mortgages funded in the US). The information provided by the borrower including income and assets are verified and matched against underwriting and risk guidelines from Freddie Mac or Fannie Mae to provide an approval or referral. This is still not a recognized loan approval as it has not been reviewed by a lender designated underwriter.

• Fully underwritten preapproval – An individual who has credit authority (typically an underwriter) reviews all necessary documentation, utilizes automated underwriting (if it is a conforming loan) and provides a written approval for which the borrower is qualified subject to a property. This is the most comprehensive review that can be provided before a client goes under contract and should be considered as good as cash. If your buyers are interested in this, ask about our SecureShop preapproval.

So if the underwriter and the loan officer use the same tools, why would there be any difference between the preapproval the loan officer provides and one provided if reviewed by an underwriter? The answer lies in the review of the documentation.

Tune in next week when we will review the benefits and drawbacks of each preapproval type.

The good news is that Key Mortgage Services can provide all levels of borrower review and approvals and our loan officers are here to help explain what you need to make the strongest offer. Just another reason having a team will make you an invaluable leader to your client through this complicated and sometimes stressful experience. 

Reach out to a Key Mortgage loan officer today.