What is a Fully Underwritten Pre-approval?
By Chase Marsh on January 20, 2024
Buyers searching for a home in the past six-to-twelve months already know how competitive the real estate market is across the country. Long lines at open houses, offer deadlines for houses listed just a week, and bidding wars are all the norm right now.
With the frustration of a rejected offer or two, buyers seek ways to give themselves an advantage versus the competition. And since making a larger down payment or an all-cash offer isn’t possible for everyone, buyers need to get creative.
One such way to give yourself an edge relative to other buyers pursuing mortgage financing is to request a fully underwritten pre-approval from your lender. Below we highlight the key items you need to know.
Definition of a fully underwritten pre-approval
A fully underwritten pre-approval is the best and most comprehensive mortgage pre-approval a homebuyer can receive when they want to buy a house as it is actually a conditional mortgage approval. The key difference compared to a standard pre-approval letter is that the mortgage lender performs the majority of the underwriting process before a homebuyer even makes an offer rather than after a purchase agreement is signed.
This process is sometimes referred to as pre-underwriting where the mortgage lender performs its due diligence on the homebuyer in advance. As a result, the homebuyer appears even more prepared to the seller as they are fully approved for the loan amount and just need to pick a property.
Benefits of a fully underwritten pre-approval
Securing an underwritten pre-approval can be a secret weapon for homebuyers to win their dream home in highly competitive real estate markets. When buyer demand outpaces for sale listing inventory, this is commonly called a seller’s market.
In this type of competitive market, there are multiple well-qualified buyers competing for the same homes resulting in bidding wars. Some of these buyers make all-cash offers without financing contingencies and sellers prefer non-contingent deals.
One of the top reasons to get a fully underwritten pre-approval is having the option to waive a mortgage financing contingency in order to be considered alongside all-cash and other non-contingent offers.
Buyers with fully underwritten pre-approvals have the option to:
- Close on a home purchase faster
- Waive contingencies to compete with all-cash buyers
- Achieve a potentially better price
- Participate in later rounds of a bidding war
Speed creates more certainty for sellers. If a buyer is already approved for the loan amount from pre-underwriting, they are able to close much faster than a traditionally pre-qualified buyer that would still need to complete a formal underwriting process.
Risks of a fully underwritten pre-approval
While there are countless benefits of completing a pre-underwriting process, there are also important risks that buyers need to consider.
First, there is the appraisal risk on the property. While an underwritten pre-approval means the homebuyer is approved for the loan amount, the lender still needs to complete their diligence on the property. And that means the lender has an independent appraisal completed to understand the value of the home. If the appraisal falls short of the agreed upon purchase price, that might mean the buyer has to put more money down to make up the difference if they do not have a financing contingency.
Second, there is risk if a homebuyer’s credit score or income changes. Yes, a buyer may have been approved for the loan amount during the pre-underwriting process, but that is typically subject to no material changes in your credit score or income prior to purchase. Make sure to stay current on all obligations and don’t apply for any new credit cards or loans.
Finally, there is a risk if a homebuyer loses their job. When a buyer has a mortgage financing contingency, job loss can be a justifiable reason to invoke the contingency as the lender cannot justify the buyer’s income. On the other hand, if a buyer waived the mortgage financing contingency to be competitive with other non-contingent buyers, job loss could result in breach of contract and forfeiture of the contract deposit if unable to come up with the remaining funds for the purchase.
What lenders offer pre-underwriting?
Many traditional mortgage lenders and modern digital lenders offer pre-underwriting as an option. There are more steps involved compared to pursuing a traditional pre-approval or pre-qualification letter, but it saves you time later in your purchase.
On average, it takes about 1 to 2 weeks to complete the process for a fully underwritten pre-approval letter from a mortgage lender.
What are the steps to pre-underwriting?
The pre-underwriting process is similar to a traditional mortgage process for underwriting home loans, however it is completed before the homebuyer identifies a property and before they make an offer.
Mortgage lenders review income (including W2’s, paystubs, and tax returns), assets, credit reports, and all financial statements for proof of funds. In addition, the lender will verify employment with the homebuyer’s employer. Once the underwriter is satisfied with the credit package, a fully underwritten pre-approval letter is issued.
DISCLAIMER: This material was provided for informational purposes only, and is neither intended to provide, nor should be relied upon as tax, legal, or accounting advice. Prevu and its subsidiaries do not provide tax, legal, or accounting advice. You are encouraged to consult your personal tax, legal, or accounting professionals before considering any transaction as your individual situation may vary.
