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What is the difference between Prequalify, Preapproval, Loan approval and final approval?

By
Real Estate Agent with OC Signature Properties

What is the difference between prequalify, preapproval, loan approval and final approval?

When receiving an offer on a property I have listed I like to see a preapproval from the lender to give to my sellers to show them that the possible buyers have been prequalified.  Many agents do not understand the meaning of preapproval and think that the buyers have been approved for the loan.  This is not correct.  Preapproval or prequalify means the buyers have sat down with a lender  and have analyzed their credit report, income and debt and how much the buyers are borrowing and have been given a letter of approval  showing that at this particular loan the buyers appear to have the ability to be approved for this loan.  They may not even fill out a loan application at this point.

When the purchase contract is signed the buyers fill out a loan application (1003 form) and submit income statements, bank statements, and whatever else is needed and a credit report is pulled. The lender or mortgage broker submits the package to the lender for approval.  There may be conditions that need to be satisfied before the loan is approved.  Once the conditions are satisfied, the Mortgage broker may get a conditional approval based on more conditions that have to be satisfied.  Once all the conditions are satisfied the lender will issued approval to cut loan documents.  At this point the loan is looking very good and funding is just a few days away.  This is really final approval and the selling agent can start to relax.  Once documents are signed and sent back to the lender the loan is funded and if there is no 3 day recession the loan and property can be closed.

Understanding the process of a loan is very important because you know what stage the loan is in and can ask the mortgage broker the right questions and you can make the necessary decisions and tell your seller the correct information.

Posted by

Ron Accornero

Tom Braatz Waukesha County Real Estate 262-377-1459
Coldwell Banker - Oconomowoc, WI
Waukesha County Realtor Real Estate agent. SOLD!

I had a preapproval that ended up stopped in process and buyer had to go to another bank. Also had one that bank no longer gave preapprovals for much the same confusion that must have gotten them in trouble.

Dec 11, 2010 09:37 AM
Kathy Denworth
BHHS Keys Real Estate - Islamorada, FL
Realtor in the Florida Keys, Islamorada, Key Largo

Thanks for the explanation. I never could understand why some lenders require preapproval with their bank before accepting an offer. It seems to me it is a bit fishy for them to have to be prequalified by more than one lender. Can't multiple inquiries hurt your credit score?

Dec 11, 2010 09:38 AM
Robert Bob Gilbert
Berkshire Hathaway HomeServices Anderson Properties - Katy, TX
Your Katy TX ( West of Houston) Real Estate Expert

Thanks for writing this blog. I have found all too many Realtors who have NO clue what the process includes or an understanding of the terminology.

Dec 11, 2010 09:56 AM
Ronald S. Accornero
OC Signature Properties - Villa Park, CA

Thanks for reading my article. It is such a simple item yet few realtors understand what approval means.

Ron

Dec 11, 2010 10:19 AM
Ronald S. Accornero
OC Signature Properties - Villa Park, CA

Anything can happen. You know the phase  "$%&* happens" We all had the approvals go south on the last day, but most of the time it works.

Thanks

Ron

Dec 11, 2010 10:21 AM
Ronald S. Accornero
OC Signature Properties - Villa Park, CA

Kathy:

Multiple credit report inquiries does ding your credit score so hopefully the lender does not pull multiple inquiries.  I am not saying that we are dealing with several lenders but only what the meaning preapproval and final approval means.

Thanks for reading this

Ron

Dec 11, 2010 10:25 AM
Steven Brand
Woodbury, MN
NMLS# 261849

Good stuff Ron.

From an Originator's perspective I saw that you put the comment of "now you can start to relax" after the FINAL APPROVAL (or Clear to close/CTC) was issued.  Hopefully you're working with a good MLO (notice I didn't say RMLO) and you are relaxed after you get a Pre-Approval Letter.  A good MLO will not submit a Pre-Approval Letter until they:

  • confirm income docs are correct and run a "self employment analysis" if necessary
  • confirm asset docs don't have irregular or large deposits OR confirm gift funds
  • review Fannie, Freddie, FHA, VA, USDA or appropriate guidelines
  • run Automated approval via AUS (DO, LP, GUS etc)

After submission to an underwriter and getting a Loan Approval (or Conditional Commitment) back... it should ONLY be to update documents that may have expired (REO sales are still taking a while right?) or clearing issues with Title or the Appraisal.  The ONLY 11th hour issues should be due to appraisal/title issues OR if there's a job loss/death of the borrower.

Steven Brand - NMLS#261849  - iLoan  - 612.386.5306  (MN Doc and WI DFI)

Dec 11, 2010 11:27 AM
Rodney Mason, VP of Mtg Lending
Guaranteed Rate NMLS# 2611 - Atlanta, GA
AL,AR,AZ,CA,CO,FL,GA,IN,MI,MS,NC,NV,SC,TN,TX,VA,WA

There is a BIG difference between a Pre-Qualification and a Pre-Approval.  If you look at the technical definition of a Pre-Approval, you will realize that its really cant be done anymore. 

A Pre-Qualification is pretty much it these days, especially since the RESPA guidelines changes last January 1st.  The FDIC website has a very specific definition of Pre-Approval.  The FDIC states that the Pre-Approval cannot be subject to certain other additional conditions.  Basically, nothing other than sales contract, property address, appraisal, insurance, title, and no material change in borrowers qualifications can apply. 

Essentially, this means that the file be be fully reviewed and approved by an Underwriter, not a Loan Officer, prior to a Pre-Approval being issued.  If you have a Loan Officer issuing the Pre-Approval simply based off of an automated underwriting approval, then they are not following the FDIC definition of what constitutes a valid Pre-Approval letter.  Since the FDIC regulates all banks, everyone should be following this definition for them to remain in compliance. 

For a mortgages inquiries performed up to a 30 day window, there would be no impact to a borrower's credit score after the first inquiry.  After 30 days, a new cycle would start with the next inquiry.

Dec 11, 2010 11:43 AM
Ronald S. Accornero
OC Signature Properties - Villa Park, CA

Steven:

Thanks for your very valid comments! They were very specific. I am taking my MLO test for National in 30 days.

Dec 11, 2010 11:48 AM
Bill Pohl
Tetra Homes, Inc. - Loveland, OH

Ronald - Really great information. Everybody should post this in their office to show clients.

Dec 11, 2010 11:54 AM
Ronald S. Accornero
OC Signature Properties - Villa Park, CA
Thanks Bill Your right this is really info for buyers and sellers to understand what approval Newman Ron
Dec 11, 2010 12:20 PM