Have you thought about buying a home? Then you must have already heard about a pre-approval or a pre-qualification letter. You don't get any attention as a buyer until you show people any of those documents. Now the questions is are they the same? Would having a pre-qualification letter qualify you as a possible buyer as having a pre-approval letter do? Are there any difference between the two? This article published on February 10, 2014 by Bill Gassett explains it thoroughly.
February 10, 2014 by Bill Gassett
Types of Mortgage Letters
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 can only add to add to the confusion for novice buyers.
It is essential for you to know the difference between these two mortgage terms so you can plan appropriately when buying your first home.
From coast to coast, whether you are buying a home in Westborough Massachusetts or Englewood California, home sellers want to know you have the ability to buy their property.
The best way you can assure yourself that the buyer is well qualified to purchase your home is to demand a pre-approval letter. The difference between a mortgage pre-approval vs. pre-qualification is enormous!
Mortgage Pre-Approval Defined
According to the Federal Reserve’s definition, a mortgage pre-approval is a written commitment that’s issued by a lender following a comprehensive analysis of their overall creditworthiness. A pre-approval includes such factors as verification of income, verification of employment, available financial resources, as well as the evaluation of other areas typical of a credit evaluation process.
Mortgage pre-approval 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 that may or may not be related to the creditworthiness and financial condition of the applicant. These added items are ordinarily attached to the traditional mortgage application by the lender and can include an acceptable title insurance binder, the completion of 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 pre-approval 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 pre-approval letter is not a guarantee you will get the loan. It is, however, as close as you can get.
A Pre-Qualification Letter Defined
The concept behind a mortgage pre-qualification 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 upon 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 pre-qualification” is an estimate of your borrowing power. It is, in effect, 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 “pre-qualification” 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 the details of your finances and get a clearer picture of the amount and terms you’ll qualify for.
Pre-qualification vs. Pre-approval: What’s the Difference?
In a nutshell, the difference between being “pre-approved” and “pre-qualified” 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 run the application through an automated underwriting process.
A pre-approval is a far more complete and comprehensive process than what is utilized for pre-qualification status.
The Mortgage Pre-Approval Advantage
A pre-approval means that you are far closer to receiving a mortgage loan commitment from a lender than with just a pre-qualification. A pre-approval 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 pre-approval status than with just a pre-qualification letter.
Pre-approval is very helpful 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 good Real Estate agent is going to require a buyer to have a pre-approval letter and NOT just a pre-qualification when they are representing a seller.
You should understand that neither a “pre-qualification letter” nor “pre-approval” are viewed as absolute, iron-clad loan commitments from lenders. A creditor will still have to look closer to assess property appraisals, verify the information collected, and in some cases, re-check the applicant’s credit report again before agreeing to issue a loan. Having a pre-approval in hand, however, is about as close as you can get to knowing you will get financing.
When a buyer is pre-approved they will typically not get financing unless one of the following takes place:
The buyer loses their job before closing.
The 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.
So Why Seek Pre-Approval?
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 for taking the time to speak with a lender, buyers can get a more informed idea about how much they can honestly afford to spend on a home. They’ll have a better sense of which loan programs are best for them and which homes are in their price range.
Buyers will also learn how much of a down payment is required up front 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 they 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. 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 pre-approval letter vs. a prequalification letter, 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. 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 pre-approved, and you haven’t. All you have to show is your flimsy 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 is going to be unlikely to take a chance that you are going to be able to get the mortgage. I 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 around who is not pre-approved. 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 pre-qualification letter from a buyer putting an offer on one of my clients properties.
So if you are ready to purchase a home, get pre-approved for a mortgage! Getting pre-approved 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!
Other Useful Mortgage Resources:
Why a pre-approval is far more valuable to a home seller than a pre-qualification letter via Realtor.com
Five things to do before getting a mortgage pre-approval by Investopedia.
Things you should not do before buying a home via Realtor.com
Use these additional resources to further understand the difference between a pre-approval and a pre-qualification. Knowing why these two mortgage terms are not the same could put you in a better position to land the home you want!