“BUT I THOUGHT I WAS PRE-APPROVED!”

by Teresa Karst, loan officer, Ripley, WV

Many times I have been asked to provide a new borrower with a pre-qualification letter before a realtor agrees to spend time showing properties to the potential buyer.    I have also been asked by realtors to provide a pre-qualification letter for the potential buyer.    Each time this happens, I ask, “are you wanting a pre-qualification or a pre-approval?”   Most times, the look on their face or the silence on the other end of the phone let’s me know that they are not aware that there is a difference, but what a difference it can be!  

Most buyers today will schedule an appointment with their originator to determine how much they can afford to borrow for their new home.   This appointment is before the house hunting actually begins.   That’s when it becomes important to understand the difference between being pre-qualified for a loan and pre-approved for a loan.   The difference between the two terms will be crucial when you make an offer on your dream home.

Let’s start with the term pre-qualified.   Your loan originator will collect information from you about your income, your debts and down payment funds.  Your credit report will be pulled.  The originator will then discuss loan options that are available to you and will issue a pre-qualification letter showing the amount you are pre-qualified to borrow.   This letter is just an estimate of what you are eligible to borrower; it is not a commitment to lend. 

Getting pre-approved, however, will go a little farther.  You will actually be required to complete a mortgage application and provide documentation to support the information you have provided.  This will include income documentations in the form of W-2 forms, paystubs or income tax returns.  Assets will be verified with bank records.  It will require that the source of your down payment funds be verified.    Again, your mortgage options will be discussed with you and your application will be submitted to an underwriter for review.   After the application has been underwritten, a pre-approval letter is issued which will indicate the amount you are qualified to borrow.   This process can take several days to complete.

Even then, the pre-approval letter is not binding; it will be subject to a satisfactory appraisal and certain other conditions.  If anything changes in your financial position such as losing your job, changing jobs, getting additional debt, interest rates rise, etc., the information will need to be updated and the loan re-underwritten prior to final approval.

Each of these processes can be very effective and helpful depending on the needs of the buyer.  But don’t make the mistake of thinking you are pre-approved when actually you were only pre-qualified.

 

Chatham, Virginia Office Named Area’s Top Mortgage Company by Star-Tribune Readers

Loan officers Earl Stanfield and Jeff Walker and loan assistant Lisa Phipps received good news recently from the Chatham Star-Tribune.  Their Farm Credit & Country Mortgages branch in Chatham, Virginia was voted the “Best Mortgage Company” in the newspaper’s distribution area by its readers.  The branch has received the Readers’ Choice Award for three straight years.  Congratulations to the team in Chatham!  Find them here for more information.

Answers To Four Of The Most Frequently Asked Questions About Credit Scores

By Melvin Woodson, Country Mortgages Loan Originator (Bedford, VA)

It seems I grew up in a simpler time in which my mother always told me to make sure I paid my bills on time.  The simplicity of this advice does not discount the fact that it still holds true today: paying your bills on time is an excellent practice.  But that sound advice does not begin to scratch the surface of the complexity of understanding your credit score in an ever-changing environment.  With so many things such as loan rates, car insurance and even job offers driven by your credit score, knowing the ins and outs of your credit is a must.  There are also some common myths surrounding credit scores and how they are derived that some clarity is needed.  I’ve summed it up by answering four key questions that seem to pop up any time I have a conversation about credit scores.

1. First, let’s start with a very basic question:  What is a credit score and where do credit scores come from?  A credit score is a statistical model that determines future performance based on prior experience.  Think of it as your financial G.P.A. The most common model used is the F. I. C. O. model or the Fair Isaac Corporation which is a company that crunches the numbers and computes a score.  These scores can range from 300 (bloody awful) to 850 (really, really awesome).  While there are other scoring models out there, F.I.C.O scores are used  by the majority of lenders.  There are three main repositories that report credit scores: Experian, Transunion and Equifax.  Usually the individual scores from each repository is different.  This is mainly because some lending institutions report solely to one or two repositories while others report to all three.  Most mortgage companies pull what is known as a tri-merge report, all three repositories merged, and qualify you based on the middle of the three scores.  Knowing what information is posted on each of the three credit repositories avoids any “uh-ohs” when the time comes to get qualified for your mortgage or any loan for that matter.  You can always obtain a free copy of your credit report from all three repositories by going to www.annualcreditreport.com.  While this site will not give you scores without paying a fee and while the scores they provide may or may not be based on the Fair Isaac Model, it will show you exactly what information is being reported.
2. What determines your F.I.C.O. score? Here’s where a lot of the confusion comes in. First, the score is determined by five factors: payment history, amount of debt, length of credit history, inquiries / new accounts openings, and type of credit.  Payment history accounts for the largest percent of your credit score at 35%.  That’s why my mom’s advice still rings true because paying your bills on time is the single largest thing you can do to ensure your credit scores stay high.  The amount of debt you have accounts for 30% of your score.  This runs the gambit from having too much debt in general to carrying balances too high on revolving credit.  As a general rule if you do carry over balances from month to month on your credit cards, you want to keep the balance at 30% or less of the limit on your credit cards. Length of credit history accounts for 15% of your score.  Simply put, the longer an account is open and in good standing, the more it helps your credit score.  Inquiries / New account openings and types of credit account for 10 % respectively.  The main take away is that some accounts are better to have open than others.  The best accounts are mortgage and student loans followed by installment loans with open and revolving accounts at the bottom of that list.
3. Here’s another frequently asked question:  Does getting my credit pulled cause my credit score to drop?  The answer to this is yes and no.  This really depends on two things:  The type of inquiry and the time between inquiries.  A below the line or “soft inquiry” happens when you obtain your own credit report  for monitoring purposes or when companies offer prequalification/preapproval programs to consumers.  Think of the dozens of unsolicited preapproved credit cards you receive in the mail.  These inquiries, thank goodness, do not impact your credit score.  An above the line inquiry refers to the inquiry you get from the purchasing of a car, applying for a credit card or applying for other loans and financing.  These inquires do impact your score  but not immediately as depending on the score version, there is a 14-45 day window for auto and mortgage inquires.  Within this window, all of the same type of inquires a la auto or mortgage only count as one inquiry.  Where you can get into trouble is having several different types of inquires done in a narrow time frame or consistently getting the same type of inquires done outside the 14-45 day window.  But to keep things in perspective, credit inquires only account for 10% of your overall score so there is no severe damage that can be done by excessive inquiries.
4. The last question that I’m asked frequently is: How long does information remain on my credit?  If you have previously filed for bankruptcy, it will stay on your credit for 10 years after the date of discharge was ordered.  There is no limitation on how long an unpaid tax lien can remain on your credit. Suits and judgments stay on for seven years from the date of entry or expiration of appropriate statute of limitations, whichever is longer.  In most cases though judgments are removed in seven years.  Paid tax liens, company charge offs and other adverse information stay on your credit file for seven years as well.

So now that you have a better understanding of your credit, you may be thinking – what score do I need to have to qualify for a mortgage loan?  Well, to qualify for the best rates, you’re safe with a credit score of 740 or better.  If you fall in this range, that’s great but if you don’t, there’s still hope.  Most applicants with relatively low monthly debt may still qualify with credit scores as low as 620 with little to no money down.