It's early Saturday morning and Tom and Susan are celebrating. You see, their real estate agent just called to let them know that the seller accepted their offer. Tom and Susan were finally about to become homeowners.

Their realtor indicated that the seller decided to accept their offer over similar offers simply because they were pre-approved for a loan. Tom and Susan thanked their agent since it was her idea to obtain a pre-approval prior to submitting an offer. Excited, they immediately called family and friends with the good news.

About three weeks later, Tom and Susan received a different telephone call. This time it was the loan officer at their bank. He was calling to let them know that there was a problem with their mortgage: the loan was denied final approval by his underwriting department. The reason was insufficient income.

As you can imagine Tom and Susan were not only devastated by the news, but confused as well. How could the same lender that issued a pre-approval now be turning them down?

Unfortunately this scenario happens over and over within the real estate community. In fact, the New York Department of Banking recently issued a statement citing that a New York based lender issued 14,000 pre-approvals over the past 2 years and only honored 450 of them with final commitments.

How could this be possible? Here's how:

To begin, there is a fundamental problem within the real estate community with the use of the term "pre-approved" mortgage.

By itself, the word "pre-approved" gives the impression that a decision has already been made about the applicant. And since most of us have at some point received "pre-approved" letters in the mail from credit card companies, the terminology appears familiar.

The problem is that quite often a "pre-approved" mortgage, like "pre-approved" credit cards, is nothing more than a "pre-qualification." To better explain, it is important to understand the clear distinction between being "pre-qualified" and being "pre-approved" as they apply to the world of real estate.

By definition, a pre-qualification is simply a cursory look at an applicant's financial picture including credit, income, assets and liability. That is, a loan officer or a bank representative reviews an applicant's information to determine if they would qualify for a loan. Since this procedure is relatively easy to do, there should be no fee charged.

A pre-approval should mean something completely different. When a lender pre-approves you for a mortgage, it should mean that the decision maker or loan underwriter has actually reviewed your documentation, tested it against their underwriting guidelines and if satisfactory, issue you a statement of approval, or commitment, subject in most cases to minor conditions and a satisfactory property appraisal.

The clear distinction between the two is that in the case of a true “pre-approval” the loan has been reviewed by the decision maker and not by the loan officer. Regardless of the loan officer's experience, in most cases they are not the person responsible for issuing a final approval and therefore are not familiar with all of the lending or underwriting guidelines. Simply put, if your lenders pre-approval means "pre" underwriting, then all you really have is a fancy pre-qualification.

A True pre-approval, or as they are more commonly know, Full Approval, usually require an upfront fee because the lender is actually processing and underwriting your loan application as if you had a property to purchase. The fee, however, is well worth it and could save you a great deal of time and money down the road.

It's important to note that although a Full Approval is as close to a guarantee as you can get from a lender, the loan is never guaranteed until closing. That is, if your economic picture changes, (i.e. you lose your job or incur additional debt prior to closing), you could be disqualified.

Obtaining a written Full Approval from a lender is an excellent way to begin the process of purchasing real estate. At American United, we encourage all of our clients to obtain a Full Approval well in advance of their home purchase.  And since our Full Approval is good for two years our clients have plenty of time to shop with confidence.

With a Full Approval from American United you can rest assured the financing will be available for you when you’re ready to close.  To begin the Full Approval process, click here or contact us at 1-800-555-2035 to speak with a representative nearest you.