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Prequalifications, Preapprovals and Applications

By Matt Goble 28 Jun 2017

Let's start from the top with what is considered to be an application as defined by Reg. Z since the implementation of TRID. Anytime you receive the six pieces of key information, then you must ensure the Loan Estimate is provided or placed in the mail within three business days from the date the final piece of information was received. The six pieces of information that are needed for it to be considered an application are: the consumer's name; social security number, income, the address of the property securing the loan, the estimated value of the property, and the loan amount.

 

If you're a creditor, then once you obtain those six items you're on the hook to push the Loan Estimate out the door. This doesn't mean you have to make a credit decision as you still have the ability to verify that information obtained during application/inquiry, but the Loan Estimate is triggered to be provided. 

 

Now let's look at prequalifications vs preapprovals, which is a pretty fine line -

 

As described in the commentary of Reg. B, a prequalification is typically the process by which creditors or loan originators review information the consumer provides to them during inquiry such as income and assets, but does not yet have enough information to consider it an application triggering a Loan Estimate. Based on this information, the creditor is typically able to determine which credit product would be most beneficial for the prospective applicant, or for a determination on the amount of credit the prospective applicant would likely qualify, but it is not a commitment to lend. This is simply a determination based on the information the individual told you during inquiry, but has not yet been verified. The only time a prequalification becomes an "application" as defined by Reg. B is if the creditor makes a decision to deny the individual based on the information obtained during inquiry. 

 

On the other hand, a preapproval takes the prequalification a step further in that an actual loan application, per Reg. B, has been obtained, which also means that you could have collected the six items triggering the Loan Estimate to be provided. Preapprovals are also considered reportable under HMDA even if they are denied. Under a formal preapproval program, the creditor will take the information from the application such as income, debts, assets, credit score, etc. and provide a written preapproval or commitment letter based on the information provided by the applicant. The written commitment issued under the program must result from a full review of the creditworthiness of the applicant including verification of such income as is typically done by the institution as part of its normal credit evaluation program. Essentially, you are giving the consumer a commitment to lend up to a specified amount as long as the application information continues to meet the standards of the preapproval program established by the Board. Unlike a prequalification, a preapproval is particularly important for applicants who may be shopping for a new home as it allows them to determine a price range based on the loan amount contained in the commitment letter.

 

In addition to conditions involving the identification of a suitable property and verification that no material change has occurred in the applicant's financial condition or creditworthiness, the written commitment may be subject only to other conditions (unrelated to the financial condition or creditworthiness of the applicant) that the lender ordinarily attaches to a traditional home mortgage application approval. As prescribed under Reg. C, these conditions are limited to items such as requiring an acceptable title insurance binder or a certificate indicating clear termite inspection, and, in the case where the applicant plans to use the proceeds from the sale of the applicant's present home to purchase a new home, a settlement statement showing adequate proceeds from the sale of the present home.

 

Also, keep in mind that an application is not the same thing as a completed application as defined by Reg. B. A completed application is one in which the creditor has received all the information that it regularly obtains and considers in evaluating the applicant for the amount and type of credit requested. In other words, you have obtained enough information to make a credit decision. As mentioned previously, it is certainly likely that a creditor will also obtain the six items during the preapproval process, thus, triggering the Loan Estimate to be provided under Reg. Z, but the creditor still has the ability to verify all the information obtained as well as request additional information before making an actual credit decision even after the Loan Estimate is provided or placed in the mail.

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