Is It A Pre-Qualification, Pre-Approval, Or Pre-Loan Commitment Letter?

A Mortgage Pre-Approval Process is a process a Borrower goes through in order to determine the price home they will be able to qualify to purchase.  Once a Borrower has gone through this process with a qualified Mortgage Loan Originator, the Loan Originator will provide them with a letter which is normally required to be include with an offer on a property.  This letter is defined differently, and has a different degree of assurance depending on process a Borrower goes through.  The three main terms used for this letter is Pre-Qualification, Pre-Approval, Or Pre-Loan Commitment Letter.  Depending on the knowledge and experience of a Loan Originator, each of these terms could be used to define the same thing, even though they are not the same thing. My purpose for writing this blog is to attempt to define the difference between the three.  So what Is It A Pre-Qualification, Pre-Approval, Or Pre-Loan Commitment Letter?

But before I provide my definition for these three terms, I want to start out by saying there are no official procedures or definitions for each of these letters.  The definitions and procedures below are my understanding of what each one is, and could very well be defined differently by another Loan Originator.  However, no matter what a Loan Originator's definition is, there is a distinct difference between the three, and the degree of assurance a Borrower is truly qualified to purchase a home. 

So let's start with what I consider the lease trust worthy or valued letter, to the letter which has the highest degree of certainty.

• Pre-Qualification Letter:  Loan Originator inquires about income, bank information, and maybe pulls credit. From this information the Loan Originator makes a quick determination of whether the Borrower could possibly qualify for a mortgage up to a certain dollar amount. (This process is normally done over the phone)
  

• Pre-Approval Letter:  Loan Officer pulls credit, calculates income based on information verbally provided by the Borrower, and inquires about bank information and other liquid assets.  The Loan Originator then goes on to take a full Loan Application (1003).  If the Borrower has access to a fax or scanner the Loan Originator may ask the Borrower to send them paystubs, and Tax Returns if there is uncertainty about the income.  This is often the case with self-employed, or commission income borrowers. The Loan Originator then runs all this information through Desktop Underwriter (DU) or Loan Prospector (LP) along with a hypothetical Sales Price, and looks for an Approved/Eligible or Accept. (Normally done by phone or in person)

• Pre-Loan Commitment Letter:  The Loan Originator does everything that he or she would do if there was a property, pulls credit, collects paystubs, bank statements, W2's, tax returns if required for the loan program the Borrower will be applying for, and all other documents which may be required from the Borrower.  The Borrower then signs a Loan Application (1003) along with all disclosures.  The loan package is submitted into Underwriting, and the Underwriter then request tax transcripts from the IRS, verifies employment, and everything else that would be done for an actual Loan, including paying an Application Fee.  The only thing not done at this point is an appraisal because there is no property to appraise.  The Underwriter then issues a Loan Pre-Loan Commitment Approval Letter up to a certain dollar amount, based on a property being able to appraise later when a property is found.  Once the Borrower goes under contract all that remains to be done is for the property to appraise for the Sales Price.  If it is more than 30 days between the approval and the Borrower going under contract, then paystubs and bank statements may need to be updated.  At the lender I originate loans for we refer to this as a "Buyers Edge" (Normally done in person)

Again these are MY definitions, other Loan Officers will have their own, including equating a Pre-Qualification Letter to a Pre-Approval Letter.  That is why it is important to ask each Loan Originator what their process is when Pre-Qualifying/Pre-Approving a Borrower.

Of these three procedures Pre-Qualification, Pre-Approval, or Pre-Loan Commitment Letter, it obvious the Pre-Loan Commitment Letter is the best and most certain of the three.  But even though it is the best, it is the least practical if the Borrower wants to start looking at properties quickly.  The Pre-Loan Commitment Letter basically takes the same amount of time as it takes to approve an actual mortgage application, and the Borrower may not want to wait that long to start looking at properties.

Many times a Borrower may have already identified a property they want to make an offer on, or believe they will soon find a property they want to make an offer on.  Also most Realtors and Borrowers do not want to wait 2-3 weeks before they can go out looking at properties.

For these reasons the process I normally use with a Borrower is the second one, the Pre-Approval process I described above.  I never do the first, and I will absolutely not issue a Pre-Appoval Letter under any circumstances if I have not completely taken a Borrower through the second procedure, and gotten an Approved/Eligible through DU.

My Pre-Approval process is not a certainty, but it is as close to one as any Borrower is going to get to an approval short of the Pre-Loan Commitment process.  Hopefully my definition of what A Pre-Qualification, Pre-Approval, or Pre-Loan Commitment Letter is has provided a clearer understanding of the difference between all three and the assurance a Borrower is truly qualified to purchase a home.