Michael Stockton

1.      What’s the difference between pre-qualification and pre-approval?

      Pre-qualification is a simple process. The buyer is asked specific questions about their income, assets and liabilities.  Based on this information, they are provided with an amount for which they may qualify. This process can be done strictly on a verbal level or electronically over the Internet.

 On the other hand, a pre-approved buyer is one who is actually approved for a loan of a certain amount.  The pre-approval process is much more involved.  The borrower will provide proof of income, assets and liabilities and this information will be verified by the lender.  Because of this verification, pre-approved buyers are much more attractive to sellers than pre-qualified buyers.

 2.      When dealing with borrowers, what concerns lenders the most?When dealing with borrowers, lenders’ main concern is risk.  Lenders proactively manage these risks by requiring four things from a borrower:

       1.Down Payment – statistics have proven that borrowers who put down 10% or more unlikely to default on a loan.

1. Excellent Debt to Income Ratios – borrowers with high debt and low income are a high risk because they are using too much of their income to pay their current debt; e.g. credit card debt, car loans, and so on.  We describe a person with high debt and low income as having a high DTI (debt to income ratio).
2. Job History – long term employment is a good predictor that a borrower will have a steady stream of income, which will not be interrupted by a career change or termination.
3. Excellent Credit – a credit score tells an underwriter a great deal about a borrower.  Lenders take a close look at FICO scores.  FICO stands for Fair Isaac Credit Organization, the organization that developed the formulas used by credit bureaus to calculate credit scores.  (Go to www.myfico.com to learn more.)

 3.      Why do credit scores vary?  And what do lenders like?

The three major credit bureaus are:  Experian, Equifax and TransUnion.  Credit scores will vary from bureau to bureau because each bureau puts different emphasis on different factors; these factors are delinquencies, too many credit cards, balances that are too high, too many recent credit inquiries, tax liens, judgments, bankruptcies, length of credit history, and so on.Credit scores are calculated using a scorecard that allocates points for each of the above factors; however, lenders do not get to see the entire scorecard, all they see are the final scores.  FICO scores can range from 300-850.