Are you a HMDA bank? Do you have a preapproval program? What’s a prequalification?
When it comes to HMDA, pre-approvals and pre-qualifications are completely different animals. Your bank might use the terms interchangeably but it’s important you understand the difference so you don’t end up in hot water with your examiners! If you have a pre-approval program, it’s a big deal because it’s something you are required to report on your HMDA-LAR.
Click on the video to listen to David explain.
On July 7th, we hosted a webinar, “HMDA Advanced Lessons”, where we get into the more complicated issues related to being a HMDA reporting institution. Things like mixed-use properties, demographic information, complicated data fields, etc. The webinar is available now On Demand so be sure to check it out!
Transcript:
Do you have a pre-approval program? What’s the difference between a pre-approval and a pre-qualification? Hi, Dave Dickinson with Bankers Compliance Consulting.
Let’s talk about HMDA specifically. If you’re not a HMDA bank, there’s still some wording in Regulation B, the Equal Credit Opportunity Act. It talks about prequels and pre-approvals, but it really doesn’t make a big difference there. They both might be requests for credit, but let’s talk specifically about HMDA. When it comes to HMDA, if you have a pre-approval program, that’s a big deal and it’s different than pre-qualification.
What’s a pre-approval? Well, let me explain what a pre-qualification is first. A pre-qualification isn’t really defined. It says that it’s a gut level. Maybe I’m looking at their FICO score. Maybe I’m asking some debt-to-income, loan-to-value, and I’m not fully underwriting them. I’m just saying, “Yeah, I think you qualify for X amount. Let us know when you find a house.”
If you have that, you certainly have an application. You’re saying, “Yes,” or you might be saying, “No, you can’t afford a tent.” That would be an adverse action notice that gets triggered at that point. But what’s a pre-approval? Well, there’s some strict criteria.
First off, you have to have a program, and I’ll come back to that. You have to issue a written commitment for a designated period of time for a home purchase (Side note, you can’t do a refinance pre-approval.) They’re either applying or they’re not. This is only purchase loans. How much home can they afford? Written commitment, designated period of time for a home purchase where a specified dollar amount you give them, and here comes the big one.
Number five, you fully vet these applicants; comprehensive review. In fact, the Reg says that you do everything. “Full verification of income, resources, and other matters is typically done by the institution as part of your normal credit evaluation program.” That’s a quote.
Published
2020/07/27
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Amy brings many years of banking and compliance experience to Banker’s Compliance Consulting. She has worked for both large and small financial institutions and spent time working in every area of a bank. She started out as a teller in college and eventually became a branch manager.
Her love, however, was always compliance. Amy began her career with Banker’s Compliance Consulting in 2000. Her knowledge and experiences have allowed her to develop a well-rounded and practical approach to regulatory compliance. Amy is CRCM certified, has a Bachelor’s Degree in Business Administration, and is a graduate of the ABA Compliance School.
Amy & her husband have two children at home and stay busy following their activities. They spend a lot of time in the bleachers!
FAQs
What is better prequalification or preapproval? ›
While many credit card companies use pre-qualified and pre-approved interchangeably, pre-approval might indicate a slightly higher chance of having an application accepted. Getting pre-qualified or pre-approved for a credit card doesn't guarantee approval.
How accurate is a preapproval letter? ›Pre-Approved Letter Reliability
Pre-approved mortgage loan letters are considered more reliable evidence of home buyer mortgage qualification ability than mortgage pre-qualification letters. A mortgage pre-approval's reliability is also why home sellers and real estate agents prefer home buyers with them.
Prequalification tends to refer to less rigorous assessments, while a preapproval can require you share more personal and financial information with a creditor. As a result, an offer based on a prequalification may be less accurate or certain than an offer based on a preapproval.
What is the difference between a prequalification letter and a preapproval letter? ›A pre-qualification means that the mortgage lender has reviewed the financial information you have provided and believes you will qualify for a loan. Pre-approval is the second step in the loan process, which is a conditional commitment to loan you the money for a mortgage.
Is it OK to get multiple pre approvals? ›Is it OK to get preapproved by multiple lenders? Getting multiple credit checks for the same purpose, such as mortgage preapproval applications, won't negatively affect your credit score.
What is the possibility of getting denied after a pre approval letter? ›Job changes, appraisal issues and negative changes to your credit report are some of the most common reasons for a mortgage to be denied after preapproval. You may not get that final mortgage approval if an underwriter uncovers any issues.
Will I get accepted if Im pre-approved? ›A pre-approval offer suggests you've passed the first step in the screening process. But remember — you can't actually be approved for the card unless you apply. You may seem like a promising candidate, but the lender will likely want more information to process your application.
How many pre approvals get denied? ›But you might not get a mortgage at all, if you fall into some of these traps: According to a NerdWallet report that looked at mortgage application data, 8% of mortgage applications were denied, and there were 58,000 more denials in 2020 than 2019 (though, to be fair, there were also more mortgage applications).
What can jeopardize your pre approval? ›- Late payments. Be sure that you remain current on any monthly bills. ...
- Applying for new lines of credit. ...
- Making large purchases. ...
- Paying off and closing credit cards. ...
- Co-signing loans for others. ...
- Changing jobs.
However, it is possible for a lender to decline your loan application even if you were pre-approved. This is likely to happen if the lender finds the information you gave when you applied for the pre-approved loan offer was inaccurate, or if its hard credit check raises any other concerns.
Can a pre qualification be denied? ›
Getting pre-approved is the first step in your journey of buying a home. But even with a pre-approval, a mortgage can be denied if there are changes to your credit history or financial situation. Working with buyers, we know how heartbreaking it can be to find out your mortgage has been denied days before closing.
Is prequalification a guarantee? ›A prequalification or preapproval letter is a document from a lender stating that the lender is tentatively willing to lend to you, up to a certain loan amount. This document is based on certain assumptions and it is not a guaranteed loan offer.
Is preapproval soft or hard pull? ›Yes, a pre-approval is a hard inquiry. Applying for a pre-approval through a mortgage lender is a standard step in the mortgage approval process because it involves lenders looking at more detailed information. Because lenders give loans for large amounts of money, hard inquiry credit checks are routine.
Can I make an offer with a pre-approval letter? ›Including a pre-approval letter with your offer can help show sellers you're reliable and will be able to secure the financing needed to purchase their home. If you've already been pre-approved for a mortgage, it's time to update your letter to reflect your intended offer price.
Why should you not max out your pre approval? ›It creates more financial risk
If you borrow the maximum you can afford, you'll have a higher monthly payment which will be harder to cover if your situation changes. You'll have to save up a larger emergency fund, and your career choices may be constrained by the need to make that mortgage payment.
This means a preapproval is a stronger sign of what you can afford and adds more credibility to your offer than a prequalification. This will also allow you to show sellers a preapproval letter to demonstrate that your financial information has been verified and you can afford a mortgage.
Why do pre approvals fall through? ›Loan Requirements Or Lender Guideline Changes
Other changes to loan requirements or lender guidelines that could lead to a mortgage being denied after pre-approval may include; Debt to income guideline changes. Amount of reserves (savings) required of buyer.
You may be wondering how often underwriters denies loans? According to the mortgage data firm HSH.com, about 8% of mortgage applications are denied, though denial rates vary by location and loan type. For example, FHA loans have different requirements that may make getting the loan easier than other loan types.
How many times can you get a pre approval letter? ›You can get preapproved for a home loan as often as you need. Every preapproval letter comes with an expiration date. And, once the preapproval has expired, you'll need a fresh one to continue house hunting and making offers.
How many pre approval letters should I get? ›You only need one mortgage pre-approval letter. If you've had a recent change in financial circumstances such as a raise or inheritance that changes your income, credit score, or down payment amount for the better, it may be worth getting a newer, stronger pre-approval letter.
What are red flags for underwriters? ›
General Red Flags
verifications that are completed on the same day as ordered or on a weekend/holiday. homeowner's insurance is a rental policy. different mailing addresses on bank statements, pay stubs and W-2s. assets are not consistent with the income.
Unlike prequalification, preapproval is a more specific estimate of what you could borrow from your lender and requires documents such as your W2, recent pay stubs, bank statements and tax returns. The lender will then use these documents to determine exactly how much you can be preapproved to borrow.
What should you not do during underwriting? ›Tip #1: Don't Apply For Any New Credit Lines During Underwriting. Any major financial changes and spending can cause problems during the underwriting process. New lines of credit or loans could interrupt this process. Also, avoid making any purchases that could decrease your assets.
How far back do underwriters look? ›Income and employment: Most of the time, underwriters look for around two years of steady income. They'll probably ask to see your previous tax returns or other records of income. You might have to provide additional paperwork if you're self-employed.
Is 95% chance of approval good? ›90% – 99% chance of approval
This means that you're very likely to be approved for a loan or credit card based on what you've told us. Usually, the lender will need to do a few final checks on their side to fully approve your application.
Being pre-qualified means a lender has decided you will likely be approved for a loan up to a certain amount, based on your current financial situation. To get pre-qualified, you simply tell a lender your level of income, assets, and debt.
How long is a prequalification letter valid? ›Pre-Approval letters are good for 60 days from date of issuance. They can be extended for 30 additional days with underwriter authorization. If more than 90 days have elapsed, updated documents will be required to issue another letter.
Should your pre-approval letter match your offer? ›We recommend tailoring the preapproval letter to match your offer, especially if your offer is for less than you qualify for. If the seller sees you are qualified for more, they could try to negotiate higher.
Should you show seller your pre-approval letter? ›Pre-approvals also give any offer you make an edge over offers from buyers who aren't pre-approved. It adds weight to your offer — as long as you're not low-balling it — showing the seller just how serious you are about buying.
Can you ask for more after preapproval? ›The amount you are preapproved for is not necessarily the final maximum you can afford on your home purchase. If you think that your finances can handle more mortgage, you can take action to increase your mortgage preapproval amount. Here's how: Find a co-signer or co-borrower.
Do pre approvals hurt your credit? ›
The short answer is: No. That's because a prescreened pre-approval involves a soft inquiry, which doesn't affect your credit scores. The prescreen soft inquiry is simply a way for lenders to determine if you may qualify for their credit card offer.
Does prequalification hurt credit score? ›Prequalification is typically considered a soft inquiry, and it won't hurt your credit all on its own. In fact, it can be a helpful tool for lowering your risk of being rejected for a new credit card.
Is there a downside to getting preapproved? ›It can affect your credit score
If you get prequalified multiple times over a long period, such as once in January and again in June, your credit score will be impacted. This isn't ideal, since you're looking to apply for a loan with the most favorable rate and terms.
If your financial situation changes during your pre-approval period and you do not notify the lender of these changes – particularly if they may impact your ability to service the loan – it's likely that the lender could reject your application.
Why should you not max out your pre-approval? ›It creates more financial risk
If you borrow the maximum you can afford, you'll have a higher monthly payment which will be harder to cover if your situation changes. You'll have to save up a larger emergency fund, and your career choices may be constrained by the need to make that mortgage payment.
Getting pre-approved is the first step in your journey of buying a home. But even with a pre-approval, a mortgage can be denied if there are changes to your credit history or financial situation. Working with buyers, we know how heartbreaking it can be to find out your mortgage has been denied days before closing.
How far in advance should I get pre-approved for a mortgage? ›The best time to get pre-approved for a mortgage is at least one year before you decide to purchase. As a home buyer, pre-approvals are for your benefit, so it's never too early to get one. Getting pre-approved early is an advantage because one-third of mortgage applications contain an error.
How many pre-approval letters should I get? ›You only need one mortgage pre-approval letter. If you've had a recent change in financial circumstances such as a raise or inheritance that changes your income, credit score, or down payment amount for the better, it may be worth getting a newer, stronger pre-approval letter.
Do pre approvals always work? ›It typically includes a maximum loan amount, interest rate and any other relevant terms or information. Significantly, getting preapproved for a mortgage doesn't guarantee you will actually get a loan -- or the specific rate and terms on offer.