Loan Prequalification vs. Preapproval

By Todd Abelson NMLS #180858 on .

Loan Approval

Daily I’m asked “what’s the difference between loan prequalification vs. preapproval“?

No wonder why when we in the Real Estate Industry have used these phrases interchangeably!

In a nutshell: prequalification is a statement of opinion from a Loan Originator while a preapproval is the statement of fact as a result of a formal analysis and review by an Underwriter – HUGE difference. Let’s drill down a bit and see what goes into these.

First, after an in depth consultation with a potential Buyer, a Loan Originator (LO) should be reviewing:

  • Credit Report
  • Paycheck Stubs
  • Tax returns with W2’s, 1099’s, K-1’s, etc.
  • Asset statements (referencing the funds to be used for down payment, closing costs, prepaid items and reserves)
  • Any additional financial documentation unique and/or specific to this person or their intended transaction.

Once completed the LO should be in the position of issuing a Prequalification letter = STATEMENT OF OPINION

Here’s where it gets a little tricky – having spoken with maybe 10,000 people over my career, most potential homebuyers are reluctant to provide the above documentation BEFORE they’re under contract. The reasons vary, but the bottom line is: at best any prequalification letter, a STATEMENT OF OPINION, is a “loose” document to begin with; a prequalification letter issued WITHOUT reference to the supporting documents (listed above) is tantamount to saying “the prospective homebuyer told me a story and I believed them”. Fairly useless in most SELLER’S eyes. So…

RULE #1 – to have the best shot at getting your offer accepted, provide your LO with EVERYTHING up front.

Getting back to the prequalification form, it should contain at a minimum the following information:

  • The offer price
  • The loan amount
  • An expiration date
  • Names of all buyers
  • Percent of the down payment
  • Loan type (Conventional, Jumbo, USDA, FHA, VA, etc.)
  • Loan term (fixed or adjustable, 30 years or 15 years, etc.)
  • Whether or not the offer is contingent upon the sale or lease of another property
  • Whether or not the offer is contingent upon a Seller Concession
  • Contact and legal information for the LO including company name, address and license plus his/her Nationwide Mortgage License System (NMLS) number

Next, let’s look into the Preapproval. Also called a “Credit Approval” this is where a complete loan file, including ALL supporting financial documentation, is submitted to an Underwriter for a formal review. At the end of the review a “Loan Approval” is issued and signed by an Underwriter. Of course since there’s no reference to a property that component of the transaction still needs to be addressed… but that’s why its called loan PREapproval = STATEMENT OF FACT. Furthermore, since this is signed by an Underwriter is, in effect, a commitment on behalf of the mortgage lender to “make that loan” with caveats such as “no change in financial position”, an acceptable property & appraisal, the loan program remaining, etc. But you get the idea.

Putting yourself in the position of the SELLER, which would want to see:

  1. Prequalification letter showing that no supporting documentation was provided by the Buyers
  2. Prequalification letter showing that all documentation was provided by the Buyers
  3. Preapproval letter showing that the funds will be committed as soon as a viable property is selected

Of course #3 is best, but #2 is still very adequate in most cases.

Guess what MOST LO’s deliver – you guessed it: #1

Armed with this information –

  • If you’re a Buyer PLEASE insist on the highest level your Lender will provide and be prepared to supply all pertinent supporting documents.
  • If you’re the Buyer’s Agent PLEASE insist that your clients select their Lender early in the process and provide all supporting documentation as soon as possible.
  • If you’re the Listing Agent PLEASE insist that the Buyers provide all supporting documentation to their lender-of-choice within 24-hours of contract acceptance.

Armed with this information – Happy Shopping!!!

Call Todd Abelson at Sunstreet Mortgage for all your mortgage needs: (520) 331-LEND (5363)

FICO 09 Takes Steps to Help the Home Buyer

By Todd Abelson NMLS #180858 on .

FICO LogoBy Mindy Leisure, Manager of Rescoring Services, Advantage Credit Services (

Fair Isaac, the creator of the FICO scoring models has announced that this fall it will be releasing a new version of its scoring model – FICO 09. An exact release date has not been set. There are some major changes in this new model that could help more borrowers get home loans. In theory these changes are great for the consumer, but unfortunately a borrower may never see the benefits from this scoring model if it isn’t accepted by Fannie Mae and Freddie Mac.

One of the biggest changes in FICO 09 is around medical collections. If a borrower has unpaid medical collections they will carry less weight than before. So a potential borrower with some outstanding medical debt could see an increase of up to 25 points in their credit scores. The borrowers that will gain the most benefit are those with paid medical collections, which will now
be completely excluded from the scores. For some borrowers this could mean a potential of a possible 100 point increase in their scores, depending on what the rest of the credit report looks like.

According to data gathered by Experian, approximately 64.3 million people have a medical collection on their credit report. Out of that number, 9.4 million had a medical collection with no balance. That’s 9.4 million more possible home buyers with the new scoring model as those collections will no longer be factored into the scores. Collections that are not medical, paid or unpaid, will still be factored in as well as late payments on accounts, public records, etc.

Regulators and some large lending institutions have long thought that consumers were too heavily penalized for medical collections. The majority of medical collections are generally because of miscommunications with insurance companies or the result of unpredictable events such as a heart attack or car accident. Since over 50% of collections on credit reports are medical, according to the Federal Reserve, this change in the scoring model is long overdue. Vantage Score took this step last year and changed their model to exclude all paid collections, medical or not. While the Vantage Score is used by some banks it is not widely used by mortgage lenders as it is not accepted by Fannie Mae or Freddie Mac.

Not everyone agrees with the new scoring model though, some banks and lending institutions feel this may be opening the door to allow consumers to get into loans that they may ultimately default on. They have a choice as to whether or not to allow this scoring model to be used in their loan making decisions. At this point, it is too early to know which lenders will be willing to utilize the new model.

The biggest issue is that the change won’t help consumers at all unless Fannie Mae and Freddie Mac agree to use it. Right now they are very specific in the scoring models they will accept. When FICO 08 was released they never adopted it. The only scoring models Fannie and Freddie will accept are:

  • Experian Fair Isaac Version 2
  • Trans Union Classic 04
  • Equifax Beacon 05

These models (above) are basically outdated and antiquated to some extent. Fannie and Freddie have both said they are very comfortable with the current models and “confident in the tools they use to set underwriting standards”. At this point they have no intention of utilizing the new scoring model. However with the benefits it could have for a great many consumers they will most likely get a lot of push back. Right now as far as when/if they will allow the use of FICO 09 is a waiting game. The hopes are that regulators and hopefully the Consumer Financial Protection Bureau can persuade Fannie Mae and Freddie Mac to consider changing to this new model.

The other parameters of the FICO 09 are for the most part the same as FICO 08. The scoring range is still 300- 850 and as with FICO 08, the new model also places more weight on the balances on revolving debt. While the older models utilize keeping revolving balances below 30% of the high credit, FICO 08 and 09 place that percentage at 10%.

Once FICO 09 is released it will be a slow process for lenders to adopt. It will most likely be used first by credit card and auto lenders and slowly be adopted by some private mortgage lenders, but as to whether it will truly help the majority of potential buyers lies in the decisions made by Fannie Mae and Freddie Mac.

Call Todd Abelson with Sunstreet Mortgage for all your mortgage needs! (520) 331-LEND (5363)

Future Eligible Area Maps release by USDA for FY2015

By Todd Abelson NMLS #180858 on .

Future USDA Eligible Area Maps are Available!USDA

Future eligible area maps are available on the USDA Income and Property Eligibility Site.  Click on “Future Eligible Areas” to preview the areas that will be affected.  Applications received beginning October 1, 2014 will be subject to the new eligible area maps.  Please be advised that every effort has been made to provide accurate and complete information regarding proposed ineligible areas on this website based on Rural Development rural area requirements as defined in the 2014 Farm Bill, using 2010 census data. Some minor modifications to areas may occur prior to the October 1, 2014 implementation.


– Most of Vail, AZ

– Most of Marana, AZ … although Avra Valley & Picture Rocks appear to be saved


– All of Sahuarita

– All of Green Valley

Some Regulation changes

The CFR 3555 regulation that will become effective September 1, 2014 will include some key changes.  Below are highlights of some of those changes or clarifications with regards to Property and Appraisal Requirements:

  • The site must be typical for the area.  The previous land to total value limitation of 30% has been removed.
  • The site must not have income-producing land.  Having a garden for personal use is allowed.
  • In-ground swimming pool restriction has been removed.
  • Water systems that require repetitive treatment to be safe bacterially or chemically are not acceptable.  Properties served by cisterns are not acceptable.

One new change effective October 1, 2014:

  • The annual guarantee fee will be increased from 0.4% to 0.5% of the unpaid principal balance

USDA Funding Update

Looks like the House and Senate will more than likely pass another Continuing Resolution this year.  All proposed budgets call for $24 Billion in authorizations for the Section 502 Guaranteed Rural Housing Program.  If the Democrats control the Senate, Congress will more than likely do as they did in FY14 and pass an Omnibus Bill.  If the Senate is controlled by the Republicans, Congress will more than likely pass a CR through March.   Please call me to discuss in further detail.

 Overall, this is good news in that while many geographies have been effected, we ended up with 4 years of relief. As a result, MANY PEOPLE were able to purchase homes that would have been ‘passed over’.

Got a question? Call me! Todd Abelson, Sunstreet Mortgage, LLC (520) 331-LEND (5363).


The BIG 3 Indicators that drive mortgage rates

By Todd Abelson NMLS #180858 on .

Stay ahead of the rate game. Here are the BIG 3 Indicators that drive mortgage rates:

  1. Economic Growth – GDP is the widest measure of the economy and is the aggregated monetary value of ALL goods and services. The GDP report is released at 8:30 am EST on the last day of each quarter.
  2. Unemployment – also called Non-Farm Payroll, this represents the total number of US paid workers. Farm payroll is excluded because it is seasonal. The report is released at 8:30 am EST on the first Friday of each month.
  3. Inflation – the increase in the costs of goods and services over time. There are two measurements: CORE PCE, which measures the prices paid by consumers without including food and energy, and CORE CPI, which measures the change in prices over time for goods and services (again without food and energy). CORE PCE is released around the first business day of the month; CORE CPI is released around the middle of the month.

Call Todd Abelson at Sunstreet Mortgage, LLC in Tucson Arizona for all your mortgage needs! (520) 331-LEND (5363)