Chapter 8 — Key Takeaways
The core claims
- A borrower's number and an underwriter's number are different numbers. On the Linden Street file the household would honestly describe its income as about \$145,000 a year; the file counts \$126,000. That \$19,000 gap — \$1,583.33 a month — is worth roughly \$675.45 of monthly obligation at this file's 42.66% back-end ratio, or about a hundred thousand dollars of loan. Never take a number. Take a structure.
- Qualifying and affording are different questions. The file answers the first. The borrower is asking the second. You are the only person in the transaction positioned to ask it with them.
- A pre-approval rests on documentation, not verification. Documented means you hold and have read it. Verified means a third party confirmed it. A pre-approval is the first, not the second — and the letter should say so.
- A pre-approval letter is a statement of fact strangers act on. Every sentence must be traceable to a document. Sentences you cannot source get deleted, not softened.
- Bad news has a half-life. On day 1 it costs a phone call. On day 44 it costs an appraisal fee, a lock extension, earnest money, and a house.
- "Not ready" is a date, not a verdict. Produce the date, put it in writing the same day, and put it in the follow-up system.
Qualify vs. afford — the distinction, in one table
| Purchasing power ("do they qualify?") | Affordability ("can they carry it?") | |
|---|---|---|
| Asked by | the underwriter, the investor, the rulebook | the household |
| Computed from | gross monthly income | net deposits |
| Counts | PITI + MI and monthly debt payments | everything, including things that are not debts |
| Has a threshold | yes — program ratio limits | no |
| Reported by an AUS | yes | never |
| Blind to | taxes, household size, childcare, non-debt expenses, a student loan vs. a boat payment, direction of travel (Ch. 4 §4.6) | nothing, if you ask properly |
| Who can answer it | the file | only the borrower — with your arithmetic in hand |
The Linden Street demonstration. Same household, both prices approvable:
| | At \$385,000 | At the ceiling (~\$460,000) | |---|---|---| | Housing payment | \$3,033.72 | ~\$3,600 | | Back-end ratio | 42.66% | ~48% | | Margin after debts, payment, and living expenses | \$915.28 | \$349.00 | | Less maintenance at 1%/yr | −\$320.83 | −\$383.33 | | What is actually left | \$594.45** | **−\$34.33 |
(Net deposits of \$7,900.00 and living expenses of \$2,505.00 are illustrative — they are the borrower's figures to produce, not yours to estimate.)
Pre-qualification vs. pre-approval
| Pre-qualification | Pre-approval | Underwritten pre-approval | |
|---|---|---|---|
| Rests on | what the borrower stated | what you pulled and read | all of that, plus an underwriter |
| Credit | often not pulled | tri-merge pulled; rep score known | same |
| Income | stated | pay statements and W-2s in file | verified per program |
| Assets | stated | statement in file | verified and sourced |
| Automated underwriting | not run | run; findings retained | run, plus human review |
| Time to produce | minutes | hours to a day | days |
| Can still be wrong about | anything | property, appraisal, verification, any change | property and appraisal |
| Worth to a listing agent | very little | a great deal | the most |
Neither term has a legal definition and the industry uses them inconsistently. Read the recitals, not the heading — and write letters whose recitals say exactly what you did.
The pre-approval letter: the short rule
Every fact in the letter must be traceable to a document in your file. Write it. Read it sentence by sentence and name the document behind each. Delete the rest.
| MAY say | MUST NOT say |
|---|---|
| issue date and a specific expiration date | that financing is guaranteed or "fully approved" |
| program, term, occupancy, down payment percentage | a credit score, income figure, or asset balance |
| price supported and corresponding loan amount | a rate or payment stated as though locked |
| specifically what was reviewed, and on what date | an amount larger than the file supports |
| the conditions that remain | that an underwriter approved it, if none did |
| that it is not a commitment, lock, or verification | anything you cannot point at a document for |
Write it for the offer, not for the ceiling — a letter at the maximum tells the seller's side exactly how much room your buyer has. Print a date, not a duration. Re-issue rather than extend.
Numbers to have cold
| Linden Street payment | **\$3,033.72** = P&I \$2,341.94 + taxes \$385.00 + insurance \$130.00 + MI \$176.78 |
| Ratios | 28.89% housing · 42.66% back-end (obligations \$4,479.72 ÷ \$10,500.00) |
| Payment shock | \$3,033.72 ÷ \$1,850.00 = 1.64× (+64.0%) — \$1,183.72/mo, \$14,204.64/yr |
| Payment composition | P&I 77.20% · escrow 16.97% (moves) · MI 5.83% |
| Representative score | 706 — the lower of the two middle scores; price the file at 706 |
| P&I factor at 6.625%/30 yr | \$6.403117 per \$1,000 → \$640.31 on \$100,000 |
| Harlow Street | PITI+MIP **\$1,721.57** · **41.48% / 51.00%** on \$4,150.00 income, \$395.00 debts |
| Harlow cost of payment | ~\$8.01 of monthly payment per \$1,000 of purchase price → \$395.00 of car payment ≈ **\$49,300** of house |
Key terms
Affordability · whether a household can carry the payment alongside everything else, with margin. Not a ratio. Not in the file.
Purchasing power · the maximum loan, and therefore price, that documented income and debts support under a program's ratio limits.
Expectation setting · stating in advance, specifically, what will happen and when. Not reassurance.
Discovery call · the structured conversation producing a supportable purchasing power and a named list of what remains unverified.
Budget-first conversation · target monthly payment established before any price; price derived from payment.
Pre-qualification · based on stated, unverified information. Pre-approval · based on a credit report pulled and documentation reviewed, plus an automated run. Neither is a commitment or a lock.
Documented vs. verified · you hold and read it, versus a third party confirmed it.
Monday morning
You should be able to:
- [ ] Run a twenty-minute discovery call from an agenda, ending with a target payment written down verbatim and an income structure for each borrower.
- [ ] Answer the rate question in the first ninety seconds without quoting a number you cannot price and without disparaging the number they found.
- [ ] Warn a borrower, before you pull, that the inquiry may generate calls from other lenders.
- [ ] Compute a household's margin at two prices and put both on one page — then stop talking.
- [ ] Say a payment shock figure out loud, whole, without rounding down and without the words "payment shock."
- [ ] Propose the practice payment and explain both things it accomplishes.
- [ ] State the pre-qual / pre-approval difference to an agent in thirty seconds, and tell them to read the recitals rather than the heading.
- [ ] Draft a pre-approval letter and audit it sentence by sentence against your own file.
- [ ] Answer "make it \$430,000" with a number, a reason, and a time.
- [ ] Open a bad-news call with the fact, in the first sentence, as a number.
- [ ] Write a four-part plan for a borrower who is not ready, with a real date, and put the date in the system.
- [ ] Write a call note whose
DO NOT HAVEline is complete — and send the borrower the same-day written summary.