“Congratulations! You’re Pre‐approved!” What Does THAT Mean?
By Doug Goelz, Mortgage Services
When you make your offer to purchase a property, your real estate agent will include a pre‐
approval letter from your loan originator with your offer. The pre‐approval letter tells the seller
that you will be able to obtain the required financing if they accept your offer.
What kind of assurance is a pre‐approval letter? Is it a guarantee or commitment that you will
be able to get financing? The answer to the second question is “no;” a pre‐approval letter is not
a guarantee or a commitment. A pre‐approval letter is an assurance, though, that the amount
of financing, your income, your credit history, and your assets all fall within guidelines required
for the financing you want.*
Before I write a pre‐approval letter, I go through many steps to assure myself that you will be
able to get the financing you want. A good pre‐approval process should mirror the steps and
the questions an underwriter is going to ask so that there are no surprises once an underwriter
reviews the loan application. Here are some of the steps I go through before writing a pre‐
1) Obtain my own credit report. While consumers can get their own credit scores, credit
scores are calculated in many different ways and used for different purposes. The credit
report I obtain uses credit score algorithms used by mortgage lenders. Also, the
information on a credit report I obtain will have very up‐to‐date information.
2) Verify and document your income. If you are salaried, I just need to see a recent pay
stub. If we are counting bonuses as part of your qualifying income, I also may need to
see year‐end paystubs for the past couple of years to see your history of earning
bonuses. If you are self‐employed, I need to see your two most recent filed tax returns.
If you are more than a 25% owner of a corporation, LLP, or other separate business
entity, I also may need to review the tax returns of the business entity.
3) Verify expenses on other property owned. If you own other property, I review tax
returns (even if you are salaried), as well as mortgage statements, property tax records,
and insurance records for each property.
4) For borrowers with complicated tax returns or unusual scenarios, I may have a
representative at a target lender review the returns to make sure there is adequate
qualifying income. I also may talk to a bank representative to see what kind of
additional documentation will be requested by the lender, so we can make sure the
documentation is available. For example, documentation of income from trusts and gas
or oil leases can be very specific, and sometimes hard to obtain.
5) In some cases, if there are unusual facts and/or circumstances, I may run the
information through some standard underwriting software to make sure the loan
6) Any of the above steps may lead to more questions in my mind and could trigger a
request from me for more documentation.
Some lenders will review incomplete loan applications before a property is identified (called
“TBDs” in mortgage parlance, for “property to be determined”) so that an underwriter can opine
on whether a loan is likely to be approved or declined even before an offer is made.
Occasionally, I submit a TBD loan application to a lender for review. However, in my experience,
the pre‐offer reviews by underwriters are cursory and do not get into the details if the sources
of income are complex. Unfortunately, a TBD “approval” is no guarantee that an underwriter
won’t ask more questions or give a different answer when the complete loan application is
submitted. In the cases of complex sources of income, I still need to ask the questions and
discover those areas where an underwriter might have questions or issues before approving the
After all of the above, once I am confident the client will get the necessary financing, I write a
short letter to the buyer’s real estate agent stating that the client is pre‐approved for the
requested financing. Usually the letter is written for a specific offer and includes both the offer
price and the property address. By writing a letter for each offer made (rather than using a
generic pre‐approval letter for some maximum amount), the seller can see that there has been
recent conversation with the lender/broker, and the letter does not tip off the seller that the
client may be able to finance more than they offered.
After receiving an offer the seller is considering, the listing (seller’s) agent often will call me to
follow up on the pre‐approval letter submitted with the offer. The listing agent asks questions:
Am I in the area? How sure am I that the client will get the loan? Do I know what I am talking
about? While I never reveal financial details of a client, with the documentation (credit report,
pay stub, bank statements, etc.) in hand, I am able to provide additional assurance that the
homebuyer will be able to obtain the needed financing.
In some markets (but usually not San Francisco), some listing agents want to see bank
statements showing the funds for the down payment. If the listing agent requests the bank
statements, I confer with the buyer and the buyer’s agent to see whether and how to provide
them to the seller.
Once the offer is accepted, the complete loan application is submitted to the bank with
extensive documentation (including signed disclosures and an application, plus additional
income and asset documentation not collected for a pre‐approval), and the loan is
underwritten. After the complete loan package is reviewed by the underwriter, the loan can go
from “pre‐approved” to “approved.”
*Between the time a pre‐approval letter is written, even with extreme due diligence and review,
many things can happen that will cause a bank ultimately to decline a loan. For example,
despite being pre‐approved, you won’t get financing if any of the following happen:
1) Your income goes down significantly (for example, if you lose your job).
2) The property does not appraise for your offer price and you have insufficient down
payment to make up the difference between the financing you can get and the purchase
3) The property does not meet certain requirements (for example, if you are buying a
condo as an investment property, a certain number of the other units must be owner
occupied. If the HOA reports that fewer than the required number of units are owner‐
occupied, the lender could decline your loan).
4) If your credit changes from the time your credit report was originally run, AND the bank
re‐runs your credit report during the underwriting process, the bank will use your latest
credit scores. If your scores have dropped significantly (say, due to fraud) and/or you
have significant new debt (say, because you bought a car), the bank may decline your
5) Someone from whom you expected a gift (say, your parents) fails to provide the
necessary documentation, such as a gift letter.
Questions? Feel free to get in touch with me at 415‐730‐4665 or firstname.lastname@example.org