What's The Difference Between Mortgage Pre-approval vs Pre-qualification Letter?

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 can only add to the confusion for buyers.  It is important for you to know the difference between the two so you can plan accordingly when buying your first home.

Pre-Approval vs Pre-Qualification

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 credit worthiness. This 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 credit worthiness. That there is no material change in the applicant’s credit worthiness or overall financial condition prior to closing on the sale.

3. Additional terms. Limitations that may or may not be related to the credit worthiness and financial condition of the applicant; these 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 some types of loan products.

An issuance of a mortgage pre-approval letter by 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 in the near future. In effect, the mortgage loan has been submitted to underwriting.

A Pre-Qualification Letter Defined

Generally, 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 purchase a home depends upon your ability to borrow money. Because of this, you’ll talk with potential lenders before shopping for homes in order 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 basically 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 basically 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 determination about the likely 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 actually completed an application with the lender, supplied them with income data, your W2’s, bank statements, etc. The lender 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 buyer” 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.

It should be noted that neither a “pre-qualification letter” nor “pre-approval” are viewed as absolute, iron-clad loan commitments from lenders. A lender will still have to look closer to assess property appraisals, verify the information collected, and in a number of 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:

  1. The buyer loses their job before closing.

  2. The buyer has misrepresented something in their mortgage application.

  3. The buyer has not disclosed something to the lender like an impending divorce.

  4. The home does not appraise for the value needed in order to get financing.

 

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Gurcharan Garry Bhaura

Gurcharan Garry Bhaura

Broker of Record
CENTURY 21 President Realty Inc., Brokerage*
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