How Pre-approval Differs From Pre-qualification
Would you like to know how to get preapproved for a mortgage? Do you know how mortgage preapproval differs from a prequalification?
There has been some confusion among those looking to buy a home and qualify for a mortgage loan regarding the difference between a mortgage pre-approval vs. a pre-qualification letter.
Indeed, they sound pretty similar, so hearing these terms before or during the hectic time while considering buying a home can only add to novice buyers’ confusion.
Before starting your house hunting, you need to know the difference between these two mortgage terms so you can plan appropriately when buying your first home. The home buying process should start by getting preapproved for a mortgage.
From coast to coast, whether you are buying a home in Westborough, Massachusetts, or Englewood, California, home sellers want to know you can buy their property.
The best way you can assure yourself that the buyer is well qualified to purchase is to demand a mortgage preapproval letter.
The difference between a mortgage preapproval vs. prequalification is enormous! Let’s take an in-depth look at how to get preapproved with a mortgage lender for a home purchase.
Mortgage Preapproval Defined
According to the Federal Reserve’s definition, a mortgage preapproval is a written commitment issued by a lender following a comprehensive analysis of their overall creditworthiness.
A mortgage preapproval includes such factors as verification of income, verification of employment, available financial resources, and the evaluation of other areas typical of a credit evaluation process.
Mortgage preapproval status for a loan is usually conditional upon the following:
1. A suitable property. The identification by the buyers of a suitable property they wish to purchase.
2. Continued creditworthiness. Continued creditworthiness means there is no material change in the applicant’s creditworthiness or overall financial condition before closing the sale.
3. Additional terms. Other limitations may or may not be related to the solvency and financial health of the applicant. These added items are ordinarily attached to the traditional mortgage application by the lender. They can include an acceptable title insurance binder, complete a home inspection with some types of loans (VA and FHA), a certification of no termites, or similar again with certain kinds of mortgage products.
Issuance of a mortgage preapproval letter from the lender implies that a credit decision has been made that will more than likely favor the completion of a mortgage commitment letter at some point shortly. In effect, the mortgage loan has been submitted to underwriting.
Please understand that a mortgage preapproval letter is not a guarantee you will get the loan. It is, however, as close as you can get.
A Pre-Qualification Letter Defined
To prequalify for a home loan doesn’t mean much. The concept behind a mortgage prequalification is this: you are a buyer, and you’re looking for a home. You might not have sufficient funds to purchase a home for cash; however, this defines most home buyers.
As a result of these circumstances, your ability to buy a house depends on your ability to borrow money. Because of this, you’ll talk with potential lenders before shopping for homes to determine your mortgage buying power and be able to consider different loan programs to decide which might be ideal for you.
A mortgage prequalification is an estimate of your borrowing power. In effect, it is a statement from the lender putting forth that based upon your current financial circumstances, i.e., income, debt, and credit levels, you will likely be qualified for a mortgage for a certain amount.
Receiving “ mortgage prequalification” can be accomplished relatively simply by just a phone call to the lender. The lender may or may not run your credit report to confirm your finances’ details and get a clearer picture of the amount and terms you’ll qualify for.
As a real estate agent, I can honestly tell you a prequalification without verification of financials is worthless. Let’s now look at how to get mortgage preapproval, so you don’t waste your time.
How to Get Preapproved For A Mortgage
In order to get preapproved for a mortgage, you will want to start the preapproval process by speaking with a financial institution that specializes in home loans.
You will meet with a loan office or mortgage broker who will go over your financial situation and a loan program that will suit your needs. The loan type that works best for you should be discussed at length. We will discuss the type of loan you might want in detail momentarily.
There will be a discussion on the amount of money you are looking to borrow along with the maximum amount you qualify to receive. An excellent mortgage broker will discuss the monthly payment to ensure your comfort level.
It will be a good idea not to overextend yourself, especially if it is your first home purchase. Your mortgage payments should fit comfortably into your budget based on your income and other current debts like student loans or car payments.
The mortgage broker or lender will take a loan application that will be filled with your personal information.
What The Lender Looks at to Provide Mortgage Preapproval
In order for the mortgage lender to provide a preapproval letter, they will need to do some due diligence on your financial health. You can expect your loan officer to research the following information:
- A detailed look at your credit history
- Your current credit scores
- Your current debt-to-income ratio
- Employment history
- Your present income
- Assets including savings accounts and liabilities including debts such as credit cards, car loans, child support, and other personal loans.
- Recent pay stubs
- Your tax returns
The Process of Granting Preapproval
When filling out your mortgage application you will provide all of your personal information including your social security number so that your credit report can be pulled by the lender. One thing to keep in mind is that credit checks are considered a hard inquiry on your credit reports. Having a hard credit check does have a slight downward impact on your credit scores. A soft credit check does not.
However, don’t worry about applying to multiple lenders due to hard inquiries. When shopping for lenders, as long as it is within 45 days FICO scoring will treat multiple credit checks as one. Your FICO score should not drop from having multiple lenders check your score.
There are eight sections in a mortgage application you will fill out to be preapproved for a mortgage. They are the following:
- The loan type and terms of the mortgage: The type of mortgage you are looking for; how much money you are looking to borrow, the length of the loan, and the mortgage rates.
- Purpose of the loan and property information: The legal address and description of the home. The year the property was built. If the loan is for refinancing, purchase, or is for new construction financing. The lender will also want to know whether the mortgage is for your primary residence or an investment.
- The borrower’s personal information: This includes your full legal name, social security number, date of birth, marital status, how many dependents, and your address history.
- Your employment information: The current contact info for present and past employers if you have only been at your current job for under two years. Your timeframe of employment, your title, and gross monthly income will also be required.
- Monthly income and housing expense info: The financial institution will want a detailed accounting of your gross monthly income, commissions, bonuses, and any other income such as alimony or child support. You will also need to provide your housing expenses including any current mortgage payments, home insurance, property taxes, HOA dues, or any (private mortgage insurance) i.e PMI.
- Your assets and current liabilities: You will need to provide an accounting of all your saving and checking accounts with their current balances. Any other financial accounts such as stocks, bonds, mutual funds, and life insurance with their values. The lender will also want your bank account and investment account statements to validate you have available funds for a down payment, closing costs, and cash reserves. They will also want to know about any outstanding debts such as car loans, student loans, credit cards, child support, alimony, and any other debts.
- The details of your purchase: The lender will want to know your new home purchase price and the required loan amount.
- Other declarations: The last part of the mortgage application will ask questions regarding whether you have been involved with prior judgments, bankruptcies, foreclosures, liens, or pending lawsuits. Essential checking up on all the potential negative information.
You can expect the lender to charge an application fee once you have made your commitment to them. Some online lenders can grant you preapproval very quickly while others can take several days. The time frame for preapproval will be somewhat dependant on how complex your financial situation happens to be.
There will be an expiration date on your preapproval letter as well. You will need to get it updated if you don’t find a home in the allotted time frame. The amount of time granted in a preapproval letter is typically 90 days.
Taking the necessary steps on getting preapproved for a mortgage is well worth it when buying a house!Click To TweetThe Loan Estimate is Next
Once the lender has received your completed mortgage application they have three business days by law to provide you with a loan estimate. The document provides information on whether they have granted your mortgage preapproval request.
The loan estimate also provides basic financial information such as the specific mortgage amount, the type of mortgage, your interest rate, estimated closing costs, estimated payments, an estimate of home insurance and property taxes. There will also be a maximum loan amount you’re approved for. The specific loan amount will be based on all your financials provided.
When you are preapproved for the mortgage the loan will then be sent to a mortgage underwriter who verifies all of your documents vs. your mortgage loan application.
Documents The Lender Will Need For Mortgage Approval
There are quite a few things the lender is going to need before they can complete the loan process. These are the things you will need for mortgage approval:
- Driver’s license or valid passport
- Income tax returns
- W-2 tax returns for the previous two years
- A Schedule K-1 if you are self-employed
- 30 days of pay stubs
- 60 days of bank statements
- Divorce papers if applicable
- Any gift letter for down payments
Here is a detailed rundown of all the documents a lender will ask for when applying for a mortgage. Check this information for all the various loan choices and what they require.
Remember too that before you commit to a lender you will want to do your own research as well. Picking a lender is not something that should be taken lightly. If you are working with a real estate agent they may offer to put you in touch with one of their preferred lenders.
It is essential to speak to at least a couple of financial institutions to ensure you get the most competitive terms. Make sure you don’t just look at the interest rate but the whole packing including the mortgage points and closing costs they will be charging.
You will want to compare apples to apples what the lenders offer you. There are many questions to ask lenders to make sure you’re well educated on the process.
The Mortgage Types to Choose From
When getting approved for a mortgage one of your key decisions will be choosing a loan type. Potential buyers have many choices including a conventional loan, FHA loans, VA loans, USDA loans, and a host of other more specialized mortgage products.
If you are a first-time homebuyer, here are some of the mortgage loan programs worth exploring. In the long run, part of the loan process will be worth your time researching which financing program is best. Check out this resource for a detailed explanation of the pros and cons of various mortgage programs worth exploring.
Pre-qualification vs. Pre-approval: What’s the Difference?
In a nutshell, the difference between being preapproved vs. prequalified is as follows:
” Mortgage pre-qualification” is a determination about whether or not the prospective applicant will most likely qualify for a loan within the lender’s current programs and standards. It is also a decision about the possible amount of the loan for which the prospective applicant will qualify.
“ Mortgage pre-approval” is a much more formal process. With pre-approval, you’ll have completed an application with the lender, supplied them with income data, your W2’s, bank statements, etc. The bank has gathered information about your employment and will also run your credit report; the lender will have to run the application through an automated underwriting process.
A mortgage preapproval is a far more complete and comprehensive process than what is utilized for mortgage prequalification status.
Some Lenders Use Mortgage Preapproval and Prequalification Interchangeably
One thing that can confuse many folks is that many different lenders use the words preapproval and prequalification as if they mean the same thing. Using the words prequalification and preapproval interchangeably can cause doubt for real estate agents and consumers alike.
Here is what’s vital to know: Accepting a mortgage prequalification from a lender may be perfectly acceptable as long as they do the same things a lender calling it a mortgage preapproval would.
In other words, if a mortgage prequalification includes verifying the borrowers, income, employment, and credit score, then you should be all set.
A prequalification is not worth the paper it is written on unless a borrower’s financial information is verified. Mortgage prequalification should always be verified by real estate agents representing home sellers.
Likewise, an exceptional buyer’s agent should check their client’s prequalification letter before moving forward.
The Mortgage Pre-Approval Advantage
A mortgage preapproval means that you are far closer to receiving a mortgage loan commitment from a lender than with just a pre-qualification. A preapproval can help buyers to take some of the guesswork out of the home buying process.
In the eyes of any seller, you are considered a “stronger customer” with mortgage preapproval status than with just a pre-qualification letter.
A mortgage preapproval is beneficial as a bargaining tool in negotiating a better deal with a seller. Overall, having a pre-approval can make you feel more comfortable with the home buying process and have more of a leg to stand on when negotiating with sellers.
It should be duly noted that any outstanding Real Estate agent will require a buyer to have a pre-approval letter and NOT just a mortgage prequalification when they are representing a seller.
It would help if you understood that neither a pre-qualification letter nor mortgage preapproval is viewed as absolute, iron-clad loan commitments from lenders.
A creditor will still have to look closer to assess home appraisals, verify the information collected, and in some cases, re-check the applicant’s credit report again before agreeing to issue a loan. However, having a mortgage preapproval in hand is about as close as you can get to proving you’ll get the financing.
When a buyer is mortgage preapproved, they will typically not get financing unless one of the following takes place:
- The buyer loses their job before closing.
- A buyer has misrepresented something in their mortgage application.
- The buyer has not disclosed something to the lender like an impending divorce.
- The home does not appraise for the value needed to get financing.
As you can now see, preapproved vs. prequalified is monumentally different.
So Why Seek Mortgage Preapproval?
You might be wondering, if neither mortgage pre-qualification nor pre-approval is a full loan verification and commitment from a lender, why should buyers even bother? There are some reasons why!
The answers are tied to the fact that buyers can get a more informed idea about how much they can honestly afford to spend on a home by taking the time to speak with a lender. They’ll have a better sense of which loan programs are best for them and their homes in their price range.
Buyers will also learn how much of a down payment is required upfront to secure their loan. Receiving pre-approval is a significant step in the real estate buying process, and doing so can help demonstrate to sellers that you are a motivated and serious buyer.
Another crucial consideration is when the lender runs your credit; there is a possibility there could be errors on your credit report that could potentially derail your ability to get the best loan terms or even a mortgage altogether. Lenders want to see someone with good credit.
If this happens to be the case, you will at least have the capacity to try to fix your credit report errors. On a few occasions over the years working as a Realtor, I have seen these kinds of credit issues surface. It is not a position that you want to be in when buying a home.
In comparing a mortgage pre-approval letter vs. a prequalification, the difference is significant! Think for a moment about this. You go searching for that unique property that you want to buy and find it right away. You, however, have not taken the time to get pre-approved for a mortgage.
Submitting an Offer Without Mortgage Preapproval
While submitting your offer, the seller’s real estate agent relays to your agent that they have another offer on the home.
The other buyer has been mortgage pre-approved, and you haven’t. All you have to show is your flimsy mortgage pre-qualification letter. All things being equal, who do you think is going to get the house?
More than likely, it won’t be you because the seller will be unlikely to take a chance that you will be able to get the mortgage. It would be a real gamble on the seller’s part to do so!
As a top Real Estate agent, I will not even consider showing homes to a buyer who is not mortgage preapproved. There is entirely no point in showing homes that a buyer is not qualified to purchase.
Home sellers are certainly not going to want to have unqualified buyers walking through their house either. This is a complete waste of everyone’s time.
Likewise, I will not accept a mortgage pre-qualification letter from a buyer putting an offer on one of my client’s properties unless it includes verifying the items mentioned previously.
So if you are ready to purchase a home, get pre-approved for a mortgage! Getting a mortgage pre-approval will put you in the best position to buy the home of your dreams.
Hopefully, you are beginning to understand that the difference between a mortgage pre-approval and pre-qualification is monumental!
How to Increase Your Chances of a Successful Mortgage Preapproval
One of the most vital things you can do before buying a home is to get your financial house in order. Borrowers who have a solid financial history backing them tend to get the best mortgage terms from lenders.
If you know your financial status needs improvement, you may want to consider using a company such as Credit Karma. By using Credit Karma you can improve your credit standing. The site is free and offers tips and advice on making the best credit decisions.
Increasing your credit score takes some time. If you know you want to purchase a home, start working on it months in advance. You will be well on your way to getting mortgage preapproval and making a successful house purchase!
You should now have a much better understanding of how to get preapproved for a mortgage.
Other Useful Mortgage Resources:
- Why a pre-approval is far more valuable to a home seller than a pre-qualification letter via Realtor.com
- See five things to do before getting a mortgage pre-approval by Investopedia. As a buyer, you can do some smart things to put yourself in a better position to have a successful real estate transaction.
Use these additional resources to understand further the difference between a mortgage preapproval and a prequalification. Knowing why these two mortgage terms are not the same could put you in a better position to land the home you want!
About the author: The above Real Estate information on the mortgage pre-approval vs. pre-qualification was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 34+ Years.
Are you thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northboro, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westboro, Whitinsville, Worcester, Upton, and Uxbridge MA.
I do not believe in a pre-qual at all. You can tell a bank anything and get a pre-qual letter. Let me give you an example. I had a short sale – my property. Was short sale approved by my bank. The buyer came in with a pre-qual latter. His bank did 2 extensions for this buyer and then near the end stated that they did not get our Shortsale approval letter – hmmm – hard to bevel when we gave it to them, and that they did not run the persons credit for 2 months waiting for this letter from the bank for short sale approval. Signed extensions and then came back that their buyer had crap credit… most people know roughly what their credit score is and why did the buyer bank NOT run the buyer credit… What a waste of time….the buyer had inspections done and even did a couple repairs..then his bank to come back with that.. Shame on them
Roni your story is the perfect example of why a pre-qualification is meaningless. There are a lot of people in your transaction that did not do their job! I assume there were Realtors involved? Shame on them especially in a short sale transaction!
Roni I can understand why you would have not faith in a per-qualification letter. Did you not have a Realtor working on your behalf on the short sale? A pre-qualification letter means nothing as you have sadly found out.