Are you pre-approved or just pre-qualified?
What's the difference?
The terms pre-approval and pre-qualification are often used interchangeably. To me, there are 2 distinct definitions, but only 1 way of doing things right.
Commonly used (and practiced) definitions:
Pre-qualification - An assumption that mortgage financing can be obtained through a conversation with a consumer about income, assets, & credit. Many loan officers don't make it past this step when issuing a pre-approval letter.
Pre-approval - A preliminary approval based on a completed loan application & analysis of required income, asset, and credit documents, as well as any required explanation for potential financing hurdles. Automated underwriting is completed using proper calculations.
In today's market, it is imperative that you have a full pre-approval. If your loan officer isn't asking for financial documents to put together a pre-approval, you need a new loan officer.
As your mortgage banker, I need your income & asset documents, and we need to have a discussion about anything out of the ordinary so I can be sure that if your offer gets accepted, we'll have financing ready at settlement.
Many loan officers don't perform a full pre-approval for various reasons - it takes too long, they're lazy, clients don't want to send in documents, etc, etc, the list goes on. There's no good reason to not do a full pre-approval for every applicant.
Here's why you need a pre-approval:
- Income isn't an exact science. Even for full time, salaried, W-2 employees, there can be many variables. 401K loans, child support/alimony, garnished wages, inconsistent bonus/commission structure, Social Security for children turning 18, etc. So much can adversely affect income that a simple pre-qualification can miss. I need documentation to analyze your application the same way an underwriter will.
- Your actual income & your qualifying income may be very different. Especially for self-employed borrowers, write-offs and other deductions are analyzed and may be removed from qualifying income. When your loan officer does a pre-qualification, you tell them your total income, but when your loan officer does a pre-approval, we see your tax returns and determine qualifying income the same way an underwriter would. Pre-approval prevents unpleasant surprises.
- You don't like getting tons of conditions and having to send in conditions piece-mail throughout the loan process. With a pre-approval, we'll have your full credit report, and your full income & asset statements - we can give you the heads up on any explanations or paper trails you'll need to put together in advance, so your loan process is streamlined and headache-free.
Here's why I need a pre-approval:
- I don't want to waste anyone's time. A faulty 'pre-qualification' gets your hopes up, makes your Realtor do unnecessary work, costs title companies money, and sets a seller back. Nobody wins & relationships are damaged all around. A little extra work & documentation up front makes life easier in the long run. Getting to settlement with no headaches, stress, or delays is priceless.
Why does a simple pre-qualification exist?
A good pre-approval takes time. A pre-qualification is a quick way to determine if a pre-approval is necessary. If a quick interview or credit pull reveals information that would prevent a loan approval, it's easy to address immediately.
How can you help?
When applying for a loan, have the following documents ready to go (preferably in electronic format for the sake of expediency):
- Previous 2 years W-2 forms and most recent 30 days' paystubs
- Tax returns, all schedules (If self-employed, using bonus/commission income, or if you own multiple properties)
- Award letters for any pension, social security, disability
- Asset statements (all pages) for the accounts being used in your loan transaction
A good pre-approval done by a professional mortgage banker can be the difference between getting the keys to the home of your dreams, or having your dreams shattered. So are you pre-approved, or just pre-qualified?
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