SANTA CRUZ (MARCH 14, 2009) - Despite the fact that the numbers  (home sales and the median price) for homes in Santa Cruz County are down from their heady highs of a few years ago, sales are happening and multiple offers are not uncommon. When sellers have more than one offer to consider, they must weigh not only the sincerity of each offer but also the validity of each offer. Sellers expect that the prospective buyer making the offer is not only ready and willing but also able to buy their home. They expect an offer on their property to be accompanied by a pre-approval letter.

Just a couple of years ago it was easy to get a mortgage and virtually anyone who wanted one could get one. In those days, sellers really didn’t have to worry too much about whether or not the buyer was able to buy. It is much different today; not in twenty years have I s

A pre-approval is a loan approval (based on an assumed sales price) without identifying a specific property which means that we do not yet have a purchase contract, appraisal or preliminary title report.

When a borrower has been ‘pre-approved’ for a mortgage it means that the borrower has provided the appropriate income, asset and current job documentation and that an underwriter has reviewed and accepted it as being accurate and sufficient. This information, along with the desired sales price, loan amount, interest rate, property type, occupancy, etc., is then input into standardized and automated underwriting software that has been provided by either Freddie Mac or Fannie Mae. The underwriting system obtains the borrower’s credit report, analyzes the borrower’s income, assets, job stability and credit history and either approves or declines the requested mortgage.

If approved, the system will provide a list of any other documentation that may be required before the final approval can be issued. For example, this time of year, if the borrower was pre-approved in January with just 06 & 07 tax returns and W-2s, the 2008 W-2s are now required to update the pre-approval. Or, if there are not two years of job history for a professional, a college diploma may be required to demonstrate a minimum of two years in the same field (college counts).

Not only do borrowers have to meet current guidelines to get pre-approved but since guidelines are constantly changing, approvals have to continually be updated. A loan approval last month may no longer be an approval this month. Freddie Mac and Fannie Mae are constantly tweaking their underwriting software models and they do not always alert us in advance when changes in guidelines are made.

A pre-approval is only as good as its source. There are many levels of pre-approvals. A mortgage consultant may merely write a letter based on the information they have received from the borrower. A loan processor may do a preliminary underwrite of the file and run the loan data through an automated underwriting system and issue a preliminary approval. However,  a true and formal pre-approval can only be granted by an underwriter with signing authority.

Unless the lender you are dealing with has an underwriter on-site, the process of obtaining a loan approval can take a significant amount of time as larger lending institutions require loan applications to be processed and underwritten through central offices.

Be sure to choose your lender wisely and base your timing accordingly. Remember that a pre-approval that can not be validated by an underwriter can cause a lot of grief and wasted time.

Anyone who wants to buy a home within the next 6 months should be selecting and meeting with their mortgage consultant now in order to start the pre-approval process. Needless to say, this process should come before the home search begins.

This column is written every Sunday by Peter Boutell, Certified Mortgage Planner and a principal at Santa Cruz Home Finance. You may reach him at (831) 425-1250 of email him at Peter@SantaCruzHomeFinance.com.