Question: “I went onto a mortgage lender’s website and got pre-qualified for an FHA home loan. They gave me an estimated amount I might qualify for, and then I got an email from a guy asking for various documents. I haven’t gotten back to him yet. What does pre-qualifying mean, exactly? If I am pre-qualified for an FHA loan, does it mean I’ll be approved by the lender later on?”
Congratulations on your pre-qualification. Unfortunately, it doesn’t mean as much as you think. In most cases, an online “prequal” is nothing more than a way for the lender to capture your contact information, so they can follow up with you.
The next stages are the loan application, document submission, credit check, appraisal, and underwriting (usually in that order). You might eventually be approved, or you might not. It’s too early to tell. Just know that the FHA pre-qualification by itself doesn’t guarantee anything.
Getting Pre-Qualified for FHA = Getting the Ball Rolling
If you were pre-qualified online, as you’ve mentioned, you probably entered some very basic information about your finances. These web-based forms typically ask for monthly income, down payment amount, and estimated monthly debts.
After entering this information, you may have received a standard pre-qualification message. I’m willing to bet there were some disclaimers on the page as well. Those disclaimers would explain two things:
- Being pre-qualified for an FHA loan is not a commitment to lend.
- Final approval will depend on a variety of factors including your credit score, debt level, etc.
At the very least, you’ve got the ball rolling. You’ve made the first contact with an FHA-approved lender. And that’s a necessary first step. Next, you’ll need to follow up with various documents so the loan officer can create an application file. They’ll want to see your recent bank statements, tax returns, pay stubs, and other financial documents.
Bottom line: Pre-qualifying for FHA does not represent a guarantee from the lender. It simply moves you a step further in the process. It puts you in touch with a mortgage broker or loan officer who can tell you whether or not you meet the lender’s minimum criteria. So in that regard, it’s worth your time.
It Means You Might Be Approved for a Loan – Emphasis on ‘Might’
Pre-qualification starts the flow of documents between you and the lender, which is a necessary step toward loan approval. But there is still a long way to go in reaching the finish line. Being pre-qualified for an FHA loan starts the process. Here’s what usually happens next:
- Application — You’ll have to complete a Uniform Residential Loan Application (URLA) to move the process forward. Do a Google search for “Fannie Mae form 1003” if you want to see what the application looks like.
- Documents — The lender or loan officer will request a wide variety of documents needed to underwrite the mortgage. See the “documents” hyperlink provided above.
- Appraisal — Once you have found a home and made an offer to buy it, the lender will have the property appraised to determine its market value. The appraiser will also check to see if the home meets HUD’s minimum property requirements for health and safety. If it does, the process can move forward. But if the appraiser finds issues that cannot be corrected, it might become a roadblock to financing.
- Underwriting — When all documents have been gathered, and the home has been appraised, your application file will move on to the underwriting stage. The underwriter will closely examine all documentation to ensure that the loan is within guidelines for approval.
- Conditions — If the underwriter finds problems that need to be resolved, he may issue a “conditional approval.” This means the FHA loan might be approved, as long as you can resolve the conditions that came up. Sometimes, conditions can be resolved easily with a simple letter of explanation. Other times, underwriting problems can become deal-breakers.
- Approval — When the file clears underwriting, you are fully approved and can proceed to closing. At this point, there’s a pretty good chance the loan will close (as long as nothing changes with your qualifications, or with the status of the home).
As you can see, the level of verification increases with each step. FHA pre-qualification often takes place online, through the lender’s website. So there isn’t any verification of documents, such as bank statements, W-2 forms, etc.
Getting back to your question: Does being pre-qualified for an FHA loan mean you’ll be approved later on? No. It doesn’t mean much at all, frankly. There’s a lot that can go wrong between the pre-qual and the final approval. The underwriting stage is where most loans “fall through.” That’s the part of the process you should be most concerned with, as a borrower.
When you get a “clear to close” signal from the underwriter, you can breathe a sigh of relief.