Pre-Approval vs Pre-Qualification

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According to the Federal Reserve, a pre-approval is a written commitment issued by a lender after a comprehensive analysis of the creditworthiness of the applicant, including such verification of income, resources, and other matters as is typically done as part of a normal credit evaluation program. 

The pre-approval is conditioned solely upon the following:

1) identification of a suitable property;
2) no material change in the applicant's financial condition or creditworthiness prior to closing; and
3) limitations not related to the financial condition of creditworthiness of the applicant that a lender ordinarily attaches to a traditional mortgage application, such as completion of a home inspection, an acceptable title insurance binder, certification of clear termite inspections, etc.

The issuance of a pre-approval letter implies that a credit decision has been rendered and a mortgage commitment letter is available.  That means the loan has been submitted to underwriting.

 

So - What's the difference between someone who is "pre-approved" for a loan and someone who is "pre-qualified?" Is one better than the other?  And if so, how?

 

In general terms, the idea behind pre-qualifying is this: You're a home buyer. You may not have enough money to buy the home for cash (do not be distressed, this makes you absolutely normal).

The result: Your ability to buy depends on your ability to borrow money, so it makes sense to speak with lenders before looking at houses to check your mortgage power and consider which loan program might be best for you.

 

So here's the difference:

 

“Pre-qualification” is an estimate of borrowing power. It is a statement from your lender saying “based on your income, credit, & debt levels” you are qualified for a mortgage for “x” amount of dollars. This can be accomplished by a simple phone call to a lender. They should also run a credit report.

 

A pre-qualification is a determination on whether the prospective loan applicant would likely qualify for credit under a lender's programs and standards, or a determination on the amount of credit the prospective applicant would likely qualify.

 

“Pre-approval” is likely to be a more formal process. Here you have actually completed the application with the lender, possibly supplied them with your income information, bank statements, W2’s, etc. The lender has asked about your employment & also runs a credit report. This is a more complete process.  The lender should have run the application through an automated underwriting process.

Also a pre-approval, helps take the guesswork out of buying. In other words with a pre-approval you are closer to getting a mortgage commitment than with a pre-qualification. In the eyes of a seller, you are therefore a “stronger buyer” than the pre-qualification buyer. This is also more helpful in negotiating a better deal for you & makes you feel more comfortable with understanding the process & how it works.

 

Neither a "pre-approval" nor a "pre-qualification" are seen as absolute loan commitments. Lenders still need to look at property appraisals, verify information, and in many cases, re-check credit before agreeing to make a loan.

 

If a pre-approval or pre-qualification is less than a full loan commitment, why should buyers bother?

 

Here's why:

By speaking with a lender you can get an informed idea of how much you can afford, which homes are in your price range, and which loan programs might be best for you. Also, you will learn how much cash you will need to close the deal. It’s all a very important part of the real estate process. It also helps demonstrate you are a serious & motivated buyer.