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Mortgage pre-approval vs. pre-qualification letter

Mortgage pre-approval:

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.

2. Continued creditworthinessContinued 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.

An 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 issuance of a mortgage commitment letter at some point shortly. In effect, the mortgage loan has been submitted to underwriting.

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. Click To Tweet

Mortgage pre-qualification letter

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 home 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 fairly 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.

Real estate agents are typically going to review a buyer's 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 a new car loan, impacting the debt-to-income ratio (DTI).
  • The home does not appraise for the value needed to get financing.

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