What is the Difference between Pre-Qualified and Pre-Approved??
In today’s tight credit market, obtaining approval for financing BEFORE shopping for a home is a crucial step that borrowers must take. Sellers and buyers are familiar with the phrase Pre-approved” or “Pre-qualified” for a loan. Many of us assume they mean the same thing. They don’t. There is a huge difference between the two terms.
Pre-Qualification: Pre-qualification is not a loan commitment, it is a quick indication of whether a borrower should qualify for a loan or not, based solely upon the opinion of a loan officer. With a pre-qualify situation, the loan officer peeks at the borrowers finances, pay stub and credit report and estimates the approximate amount of a mortgage that the buyer should be able to qualify for.
The loan officer will usually issue a “pre-qualification” letter or certificate which indicates the borrowers finances have been reviewed and that it appears they could qualify for a mortgage loan. It is not a guarantee that the borrower will actually be able to get a loan.
- It is easy to determine if you have received a “pre-qualification” letter. If you have not signed an application and/or you have just given information over the phone…your approval is nothing more than an estimate or opinion made by a loan officer.
- If you have not paid non-refundable fee’s along with the signed application, you have not received a loan commitment by the lender.
- Pre-Qualifications should not be taken seriously by borrower or seller. Pretty much anyone can get the favorable opinion of a loan officer these days, as they are paid only on commission.
Pre-Approval: In the case of pre-approval, the borrower actually applies for a loan. Pre-approval is a written commitment by the lender, not a loan officer, which states the specific amount of money the applicant is qualified to borrow. Pre-approval involves a loan underwriter and takes some time to complete. The file contains a detailed credit report, income and down payment verification, along with a confirmation that the borrower has the ability to pay closing costs.
- If you have met your lender in person, completed an application and paid fee’s, you have started the process to become pre-approved for a loan.
- A letter of pre-approval states a maximum amount of money the borrower can obtain financing for.
- The property address will be added to the loan application and the appraisal will be ordered, once the borrower locates a property.
- The borrowers’ bank and employer will be contacted and the information submitted on the loan application will be verified.
In Conclusion:
Unfortunately for seller and buyer, the terms pre-qualified and pre-approved are not interchangeable. The difference between the two terms causes a great deal of confusion and problems.
Please keep in mind that neither is a guarantee that a mortgage will be issued. The home must qualify, too. But, a borrower that is pre-approved for a loan, is the only type of buyer a seller should take seriously.