Pre-approved does not mean what most people think
There are five different things people call being approved, and only two of them mean much. Worth knowing which one you have before you write an offer.
Pre-qualification. A conversation. Nothing verified. It is a starting point and nothing more. This is the weakest one of all since nothing is verified.
Pre-approval. Credit pulled, income and assets reviewed, documentation collected. This is real work and it is the strongest thing you can hold before you are in contract. This is where the loan officer and their team (assistant or processor) help review the file, guidelines, check with lending sources to ensure the file fits from their review the guidelines for that specific scenario
DU findings. Desktop Underwriter is Fannie's automated system. It returns a result based on what the loan officer typed into the file. Garbage in, approval out. It runs against unverified data, and it is not an underwriter looking at your documents. It is useful, it is not the same thing, and it never was. Freddie Mac has its own called Loan Product Advisor, LPA, what a lot of us still call LP, and both these are what most loan officers ask for when reviewing offers or doing a cross approval (loan officer verifying other loan officers' work) to ensure the file can close and fit within the guidelines for that specific scenario.
Conditional approval. An actual human underwriter has reviewed the full file and issued a list of conditions. Here is the part almost nobody realizes: you generally cannot get this before you are in contract, because the file does not go to underwriting until there is a signed purchase agreement. So, a buyer asking for conditional approval to strengthen an offer is asking for something that does not exist yet at that stage.
Clear to close. Every condition cleared, docs going out. This is the finish line.
The practical version for making offers:
- The strongest thing you can bring is a fully documented pre-approval, not a DU printout
- A listing agent who knows the difference is not impressed by DU findings, and one who does not know the difference is not the reason your offer wins anyway
- What moves a seller is a lender who picks up the phone for the listing agent and speaks to the file
One thing specific to investors. DSCR files do not run through DU at all. Different product, different underwriting path, no automated agency findings. So, if you are being handed DU approval on a DSCR deal, ask what you are looking at.
None of these stages are a commitment to lend, including the last one, until the loan funds.
What have you seen work on the offer side lately? Does a documented pre-approval still carry weight in your market, or has everything moved to proof of funds and cash?
- Quy Huynh
