What is pre-underwriting?

The underwriting process isn’t fun. Basically, a bunch of legal professionals representing your lender review every last detail of your life to ensure you’re a qualified candidate to receive a loan. You might have to write a letter detailing why you opened or closed a certain credit card. You might have to explain a small medical bill or a job change. You might have to remember the name and address of your apartment complex during the second semester of your sophomore year of college. And you’ll have to do it all on a pretty tight timeline while maintaining your composure. Adult responsibilities don’t stop during underwriting, although it’s my belief that a National You Made It Through Underwriting Day should be a real holiday.

Although most loans go through based on pre-approval, some buyers and lenders are opting to take things a step further by pre-underwriting. Pre-underwriting is a preliminary step toward homeownership, but it’s a pretty big one. Unlike pre-approval, which asks buyers to disclose factors like their income and job history, pre-underwriting goes much wider and deeper into a buyer’s history. Why would you want to put yourself through this before you have to? Let’s take a closer look at pre-underwriting, why it’s used, and why you might want it. 

What does pre-underwriting involve? 

Pre-underwriting means that the lender will subject your loan application to a thorough review process before you enter into any sort of contract with a seller. Normally, underwriting takes place after you put in an offer and you’re under contract. Pre-underwriting speeds things up: a lender will have an underwriter review your financials before you put in an offer on a home, and you’ll be pushed all the way through to the loan fulfillment stage. Mortgage underwriters help the lender determine the risk of offering the loan to the buyer. They’re looking for potential discrepancies or issues in your financial, job, and mortgage or rental history that might make you a high-risk candidate. This is why some people might be pre-approved for a certain amount but don’t receive a loan because of something found during the underwriting process (Note: Your loan officer will work with you to make sure this doesn’t happen). A pre-approval is an indicator you’ll be given a mortgage up to a certain dollar amount, but a pre-underwriting is a guarantee.

Why do some lenders offer pre-underwriting?

Pre-underwriting has its benefits for the buyer (see below), but the lender stands a lot to gain from pre-underwriting too. A mortgage lender who pre-underwrites their candidates will see increased loan production, faster close times, and potentially reduced labor costs since their underwriters won’t be wasting time on pre-approvals that don’t make it through the underwriting process.

Why would I want to pre-underwrite?

Pre-approval is a powerful tool to help you negotiate with a seller: It shows you’re serious, and it shows you’ve got the funds to back it up. Now, multiply that power tenfold. Pre-underwriting shows a seller the deal is all but done. But is that extra assurance really necessary? If you’re in an ultra-competitive market such as New York, Chicago, Bay Area cities like San Francisco, or Boston, maybe. That’s because pre-underwriting puts you at the same equivalency as a cash buyer; in fact, The New York Times dubbed pre-underwriting “a new weapon for bidding wars.” The seller knows you come with the goods to back up your offer, and there won’t be a mortgage contingency where you can back out if you don’t get funding, because you already have funding. What’s more, it actually gives you more wiggle room in an offer than a cash buyer. Because you’ve been guaranteed a mortgage up to a certain amount, you have more flexibility to offer more on a house without draining your cash reserves compared with an all-cash buyer.

Are there any cons to pre-underwriting?

Pre-underwriting isn’t perfect. There are a lot of reasons why you might want to skip this step. First of all, it takes more time up front. If you’re hurrying to put an offer in on a house, you’ll need to factor in extra time (probably a couple of extra weeks) if you choose to pre-underwrite, giving the underwriter time to prepare their report. 

Another downside to pre-underwriting is that it’s a relatively new service, meaning your lender might not offer it. As you prepare to begin your homebuying process, be sure to ask a mortgage lender if they offer underwriting. If so, you’ll also want to confirm they have in-house underwriters and loan processors to help keep the timeline shorter.

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