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Knowing the difference between a pre-qualification letter & a pre-approval letter

By Jeff Belonger

Mortgage and Lending with Social Media - Infinity Home Mortgage Company, Inc

March 15, 2011 01:02 AM

Pre qualification letters vs pre approval letters

Getting pre-approved over being pre-qualified, what does it all mean.

I have been doing mortgages for 18 + years and I have a very strong opinion on the difference between pre-qualification letters and pre-approval letters.

What do we keep hearing on the streets? Pre-qualification letters aren't worth the paper they are written on. So, pre-approvals are written on gold bars then? The comments below is the reason why I wanted to give more insight to this argument.

Comments from realtors in past discussions :

"A pre qualification is of absolutely no use in my market. If it is not a pre-approval letter...you have NOTHING!"

"The loads of 'preapproval' letters flying around that aren't worth didley really irk me. A good loan officer doesn't run around flying around pre-approvals unless they've done the work."

Is there any real true definition that the mortgage bankers association or National Association of Realtors adheres to? No, not really. It's all based on different definitions by different professionals. So I wanted to break it down using my knowledge and common sense. Keeping in mind that I have discussed this topic with a dozen or so mortgage loan originators who are very knowledgeable, who understand this business, and a few who have underwriting experience. For the most part, they agree with my stance.

Pre-Qualification Letters

A loan officer will usually just ask a borrower the basic information. Such as :

Social Security number to verify/check credit and credit scores

Job related questions and income earned for the year

Assets, trying to figure out how much they have to spend and how much they would have in reserves

The loan officer would then compute the qualifying ratios and if everything else looked good, would then give out a pre-qualification letter. When I do a pre-qualification, I go into more specific questions. ~ Jeff Belonger's mortgage questions ~ I go one step further and talk about your goals and budget. ~ Knowing how much of a mortgage you can afford ~

Pre-Approval Letters

The pre-approval will go a step further. The items mentioned above would be collected by the loan officer and reviewed. The loan officer would then compute such figures and run the loan through DU or LP or DO. (delegated underwriter/loan prospector/desktop originator) These are names of automated underwriting systems used by lenders. And if the system says approved, a pre-approval letter is issued.

My problem & issues with the process mentioned

Let's say the loan officer doesn't properly know how to compute income. A borrower gets paid twice a month and not every 2 weeks, which could change the qualifying ratios. Or if the borrower just changed jobs 10 months ago and gets overtime with the new job. It can't be used properly when computing income ratios. What about a large deposit that was just dumped into the savings account, yet the loan officer didn't catch this and it can't be verified.

In my opinion, a real bonafide pre-approval is one that is underwritten by a qualified underwritten or reviewed my a manager in some cases. Anyone can input data into the system and hit the button to get an approval. But if the wrong information is entered, then what? A denial?

Food for thought - I get about 2 e-mails a month from buyers that were pre-approved, after giving their pay stubs, bank statements, and W-2's to the loan officer. Two months later, these same people are denied the day prior or the day of settlement. It happens people and you just need to be careful, no matter what letter you receive. Anyone can fling around the terms, "no problem", "I guarantee", etc. Get to know certain red flags : Mortgage & Real Estate Red Flags

Conclusion :

A pre-approval letter not only is different than a pre-qualification letter, but could have different meanings from different loan officers. There are some loan officers that say they can't underwrite a loan unless you have an agreement of sale. Some who are brokers say they can't do pre-approvals because the lender buying the loan from them won't underwrite it unless it's a full package with an appraisal. But these same loan officers give out pre-approval letters, because they reviewed the information themselves. Key reminder : Lenders have their own lender-overlays and definitions.

In my opinion, stop listening to which piece of paper is valid and learn the details. Education on this topic in my opinion is very critical. And if you want to get technical, a commitment letter would be the best letter out there, because with most companies, this is issued by the underwriter. Another term would be conditional commitment letter.

Just remember : Your pre-approval letter is only as good as your loan officer....

**** This article is of my own opinion and how I view the differences mentioned above****

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Momentum Realty

North Orange County CA Real Estate Specialists - Yorba Linda, CA

Orange County CA Real Estate Agent

Another awesome post, Jeff! This is SO true and, I'm sure you'd agree that the whole "not worth the paper it's written on pre-qual" became a HUGE problem over the past 5 years or so because everyone and their mother was getting into the real estate or mortgage biz because it was "easy money"-HA HA! Sometimes I can appreciate the NMLS : )

Have a great week!

Gina Lemos

Mar 15, 2011 05:40 AM

Bill Burchard

3B Realty: 951-347-3818, CA - Murrieta, CA

Broker, Realtor, Representing Buyers and Sellers

Hi Jeff. Regarding your point, "I get about 2 e-mails a month from buyers that were pre-approved, after giving their pay stubs, bank statements, and W-2's to the loan officer. Two months later, these same people are denied the day prior or the day of settlement." This happened to a young couple I was working with. Once they had their preapproval letter, we searched for homes in their price range. We found the perfect home (they loved it!), made the offer, and their offer was accepted. This was to be their very first home and they were extremely excited, showing family and friends their new home. Two weeks into escrow, the lender called to say, “Oops! We missed something on your credit report the first time we looked at it… and now realize you don’t qualify for any loan. Sorry.” They were heartbroken, and mad! They, nor I, would have wasted our time and energy if their lender had performed their job more thoroughly from the start. Yep, this kind of thing does happen, and it’s disheartening and infuriating.

Mar 15, 2011 05:47 AM

Chris and Berna Sloan

Group 1 Real Estate - Tooele, UT

Tooele UT

Great information. Not everyone in either industry gets it. That's why I use the lenders I do, and cringe every time a buyer comes in with their own lender. Like everything else, the majority of lenders do a good job. I just seem to be having a "run" of the others lately!

Mar 15, 2011 05:52 AM

Tamara Schuster

Naperville Glen Ellyn Lisle Plainfield Wheaton Illinois - Naperville, IL

Realtor Broker - Naperville

WOW! GREAT INFORMATIVE POST. SO MUCH GETS CONFUSED THESE DAYS CLARIFICATION ALWAYS HELPS.

Mar 15, 2011 05:56 AM

Russ Msrtin

Perl Mortgage - Chicago, IL

Residential Mortgage Advisor

There is a catch 22 here. First, any great LO's word should be good as gold. Good LOs should know what will get approved and what won't. However, with that said, the commitment can only come from the underwriter.

Most lenders these days won't underwrite a file without an appraisal. I've had a few files that I thought were "iffy" as in might get approved if the u/w is in a good mood and got real commitments issued subject to appraisal as I wasn't comfortable issuing any kind of prequal or preapproval.

The catch 22 comes in because borrowers are not as committed to lenders, so many banks and LOs don't want to invest the time associated with doing "real approvals" if the borrower isn't equally as committed. Nothing sucks more than spending hours actually getting someone approved only for them to start rate shopping you over $50 bucks after the fact.

Borrowers don't understand that even though the mortgage itself is a commodity, the act of getting a mortgage is not.

The other issue is that mortgages are so complex these days that it really is hard to pre-approve anyone. Realtors and borrowers need to understand that they are borrowing large sums of money and the process takes time and needs to be taken seriously.

Mar 15, 2011 06:00 AM

Chad Ronning

Guaranteed Rate Mortgage - Maple Grove, MN

Conventional, FHA, VA, USDA

Hi Jeff-

I have had realtors try and pressure me to get them pre-approval letters prior to verifying all of their income or asset documents and I always refuse because the last thing a good loan officer wants to do is to issue a pre-approval and have the loan blow up and have your good name and reputation blighted.

A good loan officer knows when to just say NO-

Chad Ronning 612-250-1544

Loan Officer with Guaranteed Rate

Mar 15, 2011 08:25 AM

David Krushinsky

Reasy Financial LLC - Peoria, AZ

AZ MB-1044208 MLO NMLS #202115

In Arizona, the new AZ Pre-Qualification form is now part of the Arizona Real Estate Contract. It has boxes that are checked if the income, assets etc have been verified. Real step up from the form used in the past. You still have the same problem, as you point out Jeff. If you work with someone who doesn't know how to pre-qualify someone correctly, the form is irrelevant.

Mar 15, 2011 08:39 AM

Leslie Ebersole

Swanepoel T3 Group - Saint Charles, IL

I help brokers build businesses they love.

HI JEFF: GOOD!

Interesting that Alan's comments are similar to mine in our conversation yesterday. The language and processes in different areas are showing up in these comments.

It is a disservice to the seller to take an offer only to find out four weeks into the deal that the buyer isn't able to purchase the home. Some agents and LOs still operate with a motto of "let's try it and see if it sticks".

I am deeply sympathetic with Russ in comment #32: it would be very frustrating to do all the work for the offer and then lose a buyer over a perceived discount from someone else. It's best for everyone when a buyer establishes a relationship with an LO long before writing an offer on a house. AND agents shouldn't undermine those relationships with a "let's try my guy".

Mar 15, 2011 08:43 AM

Gary Woltal

Keller Williams Realty - Flower Mound, TX

Assoc. Broker Realtor SFR Dallas Ft. Worth

Pre-approval is ALWAYS desired with its depth of information that is required to come up with something.

Mar 15, 2011 10:00 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

JAY.... #20 . . I understand that get that part of your argument...but what about the pre-approval aspect of it... does it stop with the loan officer or the underwriter in order for it to be a pre-approval? thanks

ROBERT... . okay... so we do exactly that, that it takes 30 or 45 days to get a real approval. So then you go back and make your offer? In many cases, that house could be sold. Maybe just do a full application and go through the whole process with a property address of TBD... but if you read some of the comments, some lenders won't underwrite a loan with no property address. So, not back to square one. Read Shay's comment, #17... this is how it should be for many... which means a pre-qual is not a bad thing. But again, it comes down to competent loan officers. Thanks for your feedback...

DEE.... , sounds great and that is a great track record. But curious, you said.. until she has an approval or denial. After your loan officer runs the numbers or after an underwriter actually underwrites the loan? Again, just curious... thanks

SARAH.... . yes, a commitment letter can be a great thing. But that can take time... most lenders aren't set up for this on every deal.. maybe a case by case.. so unless the processing and approval process is done prior to the buyer finding a home, then what? Will the sellers put the property on hold, waiting for a commitment letter? Or are we talking about a normal time line to where they are pre-qualified, sign contracts, and have 20 to 30 days or so to obtain a loan commitment? thanks

LISA & ROBERT... . what exactly came up with your client? And thanks... I hope this helps them some. If they have any questions, they can certainly call me. I would be glad to answer any questions. thanks

JANICE... . I don't need anyone to add to my stress level, I can do that myself.. lol

JANET... . first off, not all income... tax returns for a very complicated buyer can be difficult at times... but yes, for the most part, income should be easy. Secondly, yes, we did talk about what your company won't allow. So, question for you.. you said you will collect pay stubs and other documents... after you review these and credit, do your calculations, what do you call your form? If the underwriter doesn't look at it because it's not a complete file and with an appraisal.... but you have reviewed documents and run it through DP/LP... what do you give out? thanks

TORGIE... . damn right it's an important step when buying a home... but some loan officers make it sound extremely easy at times... and I guess those are the ones to be leery about. thanks

GINA....aka advisors Choice...#28 .. yes, many got into this business because it was easy to make money. But after the national testing and such, we still hear stories of those that were pre-approved and denied a month or so later... and sometimes on the most basic issues. And thank you very much for the kind words and compliment. thanks

Mar 15, 2011 12:13 PM

Janet Guilbault

Platinum Home Mortgage Company - Walnut Creek, CA

San Francisco Bay Area Direct Mortgage Lender

Jeff: Because of the confusion in our industry between prequalification and preapproval I have elected to call it neither.

I write a letter (with cc to Realtor) outlining EXACTLY what documentation I have reviewed and have on file (tax returns, income statements, pay stubs, bank accounts etc) I say that I have run a credit report and report the results (the scores). I say that I have run DU and report the results.

Then I say that based on analyzing the file, it is my opinion as a loan officer that this borrower will be approved to purchase the property based on $_______________ and let them know the length of time I believe it will take to close the loan.

I tell them it is subject to the appraisal and final underwriting by our bank and I will often write a paragraph about the borrower as well.

I realize you would not call this a preapproval.

I guess it does not matter WHAT you call it if everyone involved knows exactly what the loan officer has accomplished by the time the buyer is making an offer. I believe a letter with this kind of detail accomplishes this goal.

This approach was taught to me by an AR member who was a lender in our area for many years, then became a Realtor. I also had MFR (my favorite Realtor) help me tweak it with some specific compelling words to dazzle sellers. It helps to be associated with my company (a recognized "brand" with a good reputation).

This letter alone has won bidding situations where borrower was not the high bid. It has convinced sellers and agents to accept an FHA offer when they said they wouldn't.

It is powerful, and it works.

Mar 15, 2011 01:48 PM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

BILL.... #29.. . that is one main problem with the pre-approval letter as opposed to the pre-qual letter. Was the loan ran through DU/LP? You get the yes or no there... and if it's a FHA or USDA deal, it can be manually underwritten. What kind of mortgage was it? Hey, people make mistakes, hence another reason why having more sets of eye balls on the deal, the better chance of less mistakes. Question, what was the issue that appeared on the credit report that killed the deal? I am very curious.... I have seen loan officers give lame excuses at the end just to cover their asses also... thanks

CHRIS... . no, not everyone in this industry gets it... and thanks for the compliment...

TAMARA... . as long as the clarification is correct, not misleading. Just remember that because I have seen some well-written posts that sounded good, but were either wrong or misleading.. especially when that person's opinion comes across as a fact. Just food for thought... and thanks for the polite compliment. thanks

RUSS... . I agree, ones word should be gold. The problem is, so many use that to their benefit to get consumers through the door by using words or phrases such as... "I promise"... "no problem".. "I guarantee".... Secondly... you hit the nail on the head to why some loan officers might not care as much, no matter who they are dealing with... because they don't want to truly invest the time needed in each deal... they go for quantity, thinking if they lose 1 or 2, they will be covered because they have a few more closing. And yes, the rate shopping sucks.. for me, it's very very rare once they do the application with me. In fact, I can remember only losing 2 people ever... but during the normal shopping process, when I haven't done an application as of yet... it can happen.. thanks for your input and feedback.

CHAD... . shame on those realtors wanting you to issue anything prior to screening the borrowers properly... good for you for standing your ground, not giving in. thanks

DAVID... . lol.. it cracks me up when they set up checks and balances that aren't fool proof... maybe it's the fools that make this up that we need to be worried about. You hit the nail on the head... all the correct boxes in the world could be checked, but if I can't qualify properly, those checked off boxes mean squat...

LESLIE... . that was my point... what you heard was not a national thing, but a local thing for purchases... and that it was on the contracts. Maybe we'll see more of this... but in all honesty, does it make any sense. Okay, so instead of my pre-qual or pre-approval letter, you just want me to check off boxes on a separate form that is attached to the agreement of sale? So that stops????? what.... thanks for your feedback... between you and David, I need to add a disclosure saying that pre-approvals aren't dead, but could be area specific with restrictions... thanks

GARY... . sure, this is more desirable than a pre-qual.. but if I didn't take my proper steps to insure that it's correct and real, how do you know? It just has a different title or name on a piece of paper... thanks

JANET...#38.. . confusion or not... it just comes down to a good loan officer that reaches out to both real estate agents to answer any questions... and one that knows what they are doing. If you still didn't know how to read credit and calculate income, the letters that you wrote would just be a smoke screen also. Glad that you have success with them. What would be worse is if someone handed out forms that said... Guaranteed Loan Approval.. which I have seen.. nothing is ever guaranteed, even if I put my stamp on it.. my name, my reputation....Just so many people think that would hold up, when it comes down to that individual and or their company... and who looked at what... thanks

Mar 15, 2011 05:25 PM

Roy Paeth

Barrett Financial Group - Murfreesboro, TN

Just a regular guy helping real people!

Great points Jeff. Preapprovals are only as good as the LO that actually prepared the preapproval. I have had clients come to me more than once telling me the LO at another bank said they were preapproved and after a few questions I know there is no way they can get approved.

Mar 15, 2011 05:54 PM

FN LN

Toronto, ON

HI Jeff - Whenever someone talks to me about pre-qualification or pre-approval, I always try to get info about their definition of the term since there is so much confusion.

BTW, I enjoyed reading the historical posts that you linked to.

Mar 15, 2011 06:58 PM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

ROY... . yes, that is the worse when someone comes to you already pre-approved and you start asking questions and you are like... huh? I don't think so. But, depending on the reasons, I sometimes say... "I highly doubt it, but you just never know. From my experience, I don't see it happening and I see red flags." I just don't ever want to say... "no way"... It's almost like saying, "I guarantee". But I definitely know where you are coming from.

MARC... that is a wise move on your part, as long as the loan officer is upfront with you. And wait, someone actually clicked on my links and read them? ;o) Hey, thanks for the kind words.

Mar 16, 2011 03:33 AM

Fred Cope

Reliant Realty in Nashville, TN - Nashville, TN

Looking For Homes With A Smile

Jeff, you have laid the issue before us with knowledge and skill. I have offered all three types of credit letters in the 27 years I originated loans. I had realty agents who took my word and never asked for a piece of paper--they relied on a track record of success that meant more to them than a piece of paper. I'm sure you have built such a reputation as well.

There were agents that would have questioned the New Testament account of the crucifixion, and have demanded with Thomas to see the nail prints in His hands: NO FAITH IN ANYONE! With some of the "pre-approval letters" they have seen, they may have found justification.

I worked with a top builder who would accept my underwriter's [a specific underwriter] word, and build. He knew we stood behind our work because we knew and did our jobs. I had a loan processor that my agents didn't bug, because they knew that she took care of things and would call if there were reason for concern. That combination of processor, loan officer and underwriter is rare--we both know that; and that is why REALTORS® had better know what they've got. Either know underwriting basics, or know the underwriter. Either learn to calculate income (including self-employed) or build a solid relationship with a proven loan officer and his/her processor.

Paper is paper, and the words are empty until you know the source of those words. A REALTOR® who jumps from Lender to Lender whenever a problem arises is a REALTOR® who will never have more than a piece of paper to show the seller--never a peace within. MORE IMPORTANT THAN PRE-QUAL, PRE-APPROVAL, OR COMMITMENT LETTER IS A LENDER RELATIONSHIP YOU CAN COUNT ON. That is what I seek as a REALTOR®.

Mar 16, 2011 02:39 PM

Aaron Johnson

Tri City Home Team / The Force Realty - Richland, WA

Join The Home Team!

When I get a pre-qual or pre-approval letter, the first thing I do is call the loan officer/broker and ask if this is a "stated" approval or if the borrower submitted proof of income/assets, etc. I don't mind showing a home to the "stated" approval. But I absolutely WON'T accept an purchase offer unless it's a "proof" approval.

I know there are a lot more items the lender has to submit to underwriting to get to a "real" approval. But why have the property tied up for a few days while the borrower gets around to verifying what he told the lender they made/have in savings? Like you said, one of the most basic stumbling blocks to the initial approval is the income. Maybe they told the lender their gross including commissions which underwriting won't accept. Maybe they started a job a month ago after a 9 month gap of unemployment. Maybe they started a job 4 months ago in an entirely new industry after a gap of income. Maybe they're including child support income that they only get once in a while from a dead-beat spouse. I've seen a lot of things trip up an approval that I've received.

Mar 16, 2011 05:32 PM

Loreena and Michael Yeo

3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX

Real Estate Agents

Jeff - I want to thank you for educating me (about the commitment letter). The differences here will become part of my Buyer's Booklet.

Here are my questions:

(1) How often is it that a loan officer will take the file to go through the entire process to receive a commitment letter?

(2) Why dont they do that?

(3) How "full proof" is a commitment letter? assuming after the process there is no other activity on the buyer's end to hurt the commitment?

(4) Does a commitment letter "expire"?

(5) Getting a commitment letter doesnt mean the buyer has an interest rate lock, right?

Mar 16, 2011 11:52 PM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

FRED & AARON... I will reply sometime today... just wanted to jump to Loreena's questions...

Mar 17, 2011 04:34 AM

Jeff Belonger

Social Media - Infinity Home Mortgage Company, Inc - Cherry Hill, NJ

The FHA Expert - FHA Loans - FHA mortgages - USDA loans - VA Loans

LOREENA... . well, most loan officers will only get a commitment letter done once the file has been underwritten with an appraisal and title. If you read the comments, some can't even do a real pre-approval or commitment letter unless there is an appraisal. A normal process of a loan should take about 2 to 3 weeks... if that loan officer has 95% of the borrowers documents.. there are a few checks and balances that need to be done during the process and if not done prior to underwriting, could still kill the deal after it's underwritten. Example... the 4506t... to where the lender is now getting transcript copies of the tax returns from the IRS. Why is this crucial and important? I had a borrower that was properly pre-qualified... asking detail questions about their income. Both had full time jobs that were W-2'd... yet one had a side job that lost money. It was brought to our attention until we received the IRS transcripts back.. now, 2 things... tax returns could have been collected, but at the time, weren't required with W-2 people, who are salaried.. secondly... I have known where someone forged the tax returns, taking negative income off.. so even if the tax returns were collected and someone did this... you won't know until the IRS transcipts came back. I one had a borrower forge their W-2 forms in 1997, combining their total income into one income.. and had a co-worker intercept our phone call when verifying income. We caught onto this... but she almost got away with this. Some people will do desparate things....

So.. regarding your questions.. I think I answered #1 ... ps.. there are some companies that say they can get a conditional commitment letter in 24 to 48 hrs. It can be done, but on every single file? Unless a great team and process set up, that is hard to do. It costs extra time and money to have that kind of set up. It's more of a service thing if that company does do this... to gain more business.And I think # 2 is answered, because it takes time away from the files that have been in process and will be closing. Reason why many companies want an appraisal, because this shows a better chance of being a real deal...

#3... never fool proof, hence why most have conditions on them. If every condition is met, then it should close. This is usually considered a "clear to close"... that everything is in, has been reviewed, etc, etc.

#4.. yes, all commitment letters expire and have expiration dates on them. Credit, income docs, and the appraisal are the biggest ones. Usually you will see 90 days pertaining to credit and some other docs. But you will still need a paystub or two prior to settlement, if over 2 weeks old and that most lenders will verify employment or again 2 days prior to settlement... so this could kill the whole deal, especially if that person just quit or was fired.

#5.. no, just because one has a commitment date, doesn't mean one is locked. It will say locked or floating on the commitment letter and how long the rate is good for... most lenders want rates locked 5 days prior to settlement.. I can see 3 or 2 days prior...

Hope this helps some... thanks for stopping by and I hope this helps some. Now deposit $20 into my profile.. lol

Mar 17, 2011 04:34 AM