It’s common to browse homes online, get inspired and then contact a real estate agent to take a look at some of those homes or similar ones that you fell in love with. Often times your agent will require that you are pre-qualified, where you basically get a general idea of how much house you can afford; which is sort of based on your own estimation. Then you decide on a house, go back to your lender, and find out that you were approved for less than what you were pre-qualified for. This happens every now-and-then once a lender takes a more thorough look into a borrower’s credit history, assets, debt-to-income ratio, etc.
Now, imagine going to a lender and getting a conditional loan approval (the closest thing to a cash-offer) with a dollar amount before even picking out a house. You know exactly what you can afford, and so you’re able to browse homes in that range, without any surprises down the road. It’s possible. Upfront underwriting, sometimes referred to as “To-Be-Determined” (TBD) underwriting, is a process where the lender issues you a conditional approval with a dollar amount within hours of meeting with you, by having all of your info go through an Underwriter at the beginning of the process rather than towards the end.
“The TBD process is streamlined for the borrower. It takes the pressure off of the end of the process because everything is pretty much buttoned up and done by then,” states Senior Mortgage Banker Ashlynn Sawyer.
As long as you come in with all of your paperwork in order, you could have a conditional approval letter in your hands within hours. It all starts with a pre-qualification conversation to find out what your goals are and what you’re comfortable with spending on a mortgage payment. Standard income documentation is reviewed, such as your W-2s, pay stubs, and/or tax returns. Credit is pulled and an application is submitted to underwriting.
“TBD makes the process quicker and identifies any issues that may need work right off the bat – such as possibly the need for a co-signer or additional work on credit. We can discuss options that may get them closer to what they were hoping for,” adds Ashlynn Sawyer.
Lenders who don’t offer upfront underwriting, such as most banks, hand your loan file off to a processor first who takes your application and then verifies it to be accurate and complete. They may request additional documentation from you to do this. Then, the underwriter gets involved. The underwriter’s main job is to confirm that you have the ability to pay back the mortgage and that you qualify for a loan product. At some mortgage companies, this process could take a couple of weeks.
With the TBD process, it’s much quicker because the underwriter has already determined that you qualify for a loan product before the file heads to processing. The conditional approval becomes a full approval once you have a property selected and a few additional items are taken care of such as obtaining an appraisal to make sure the property is worth at least what you are borrowing.
Consider focusing on “how much am I comfortable spending?” rather than “how much can I afford?” or “how much do I want to borrow?” It’s important to keep your personal budget in mind because each person has a different comfort zone when it comes to budgeting. One person may be okay with spending 40% of their budget on housing. Another may have other goals or circumstances that keep them locked in at a lower percentage. TBD underwriting may help ensure that you stay within your comfort zone.
Each loan product’s debt-to-income (DTI) ratios help keep the amount in check because some products won’t allow the housing portion of DTI to exceed a certain percentage, no matter how much you feel comfortable with spending.
Interested in purchasing a short sale or foreclosure property?A short sale is when the current owner of the property is trying to sell it for less than the full payoff and needs their mortgage lender’s approval to accept an offer. The process can be lengthy because of the back and forth negotiations between lenders. With a conditional approval letter, you offer can be more valuable to the seller of the property because the letter already has a cash value, streamlining and speeding up that process.
“Our TBD approval process allows our clients to get all of the what-if’s out of the way and have a smooth, quick transaction from start to finish,” shares Senior Mortgage Banker Amiee Carr.
“Most of my clients that start with the TBD approval are able to have more buying power when submitting an offer with an actual approval letter and also have quicker close times as their file has already been through underwriting.”
It’s important to note that TBD conditional approval letters are good for 30 days, but that doesn’t mean you’re out of luck if you haven’t found a house by then. When you finally find your home, you’ll need to resubmit updated financial information to get a new conditional approval letter. Your mortgage banker will have to make sure nothing has dramatically changed with your income, debt, and credit.
Not all lenders offer TBD underwriting because it can be expensive to have the underwriting done first and then the processing. They take a risk when they invest their employees’ time reviewing information and issuing approvals that may not lead to an actual loan. Upfront underwriting is less common with banks than it is with independent mortgage companies, like Atlantic Bay.
“We’re investing a lot to help our borrowers and we’re willing to do that upfront to save on the stress down the road. Each borrower gets a dedicated team working to get them to a quick closing,” said Ashlynn.
If you’d like to experience the TBD process for yourself, please contact us to get started.