Qualification vs Pre-Approval vs Approval

By
Mortgage and Lending with Cherry Creek Mortgage

Qualification

Qualification (or pre-qualification, as it is often called) is an opinion that your income, assets, and current debts qualify you for a loan of some specified amount. The opinion may come from a lender or a Realtor, or it may be your own based on your use of an affordability calculator. Whatever the source, the opinion does not take your credit into account, and no one is committed by it.

It used to be that Realtors did a lot of qualifications, often back-of-the-envelope affairs, so that they would not waste time looking for houses in a price range the buyer could not afford. Increasingly, they ask borrowers to become pre-approved by a lender because it is more reliable than a qualification, and lenders are willing to provide it free of charge as a way of stimulating business. Home sellers have also learned to ask potential buyers for a pre-approval.

Pre-Approval

Pre-approval is a conditional commitment by a lender to make a loan prior to the identification of a specific property. On a pre-approval, unlike a qualification, the lender verifies the information you provide and checks your credit. A pre-approval will stipulate a loan amount or monthly payment, but not necessarily the loan type or the price.

The lender's commitment under a pre-approval is always conditional, but rarely are the conditions spelled out. Pre-approvals don't have expiration dates, but some considerable time may elapse before the borrower receiving a pre-approval comes back to convert it into an approval. During that period, things can happen that cause the lender to back off. For example, the borrower's credit deteriorates, or she loses her job. No one can reasonably expect a lender to approve a loan in those circumstances.

Less clear-cut are the impacts of adverse market changes -- such as the tightening of underwriting requirements that occurred last year -- on outstanding pre-approvals. If a lender has pre-approved a loan and the market changes to the point where the same loan would not now be approvable, will the lender honor its obligation? I fear that in most if not all cases, the answer is "no." Fortunately, abrupt changes in underwriting rules occur very infrequently.

Approval

Approval is a commitment by a lender to make a loan. Unlike a pre-approval, a specific property (along with its appraised value) is identified, and the loan details are spelled out. These include the type and purpose of the loan, down payment, and type of documentation. It will also include an interest rate, even though a rate is not firmly established until it is locked. The presumption underlying an approval is that the probability of closure is high -- much higher than with a pre-approval.

It is not 100 percent, however, because borrowers sometimes drop out, and sometimes one or more of the conditions that accompany the approval are not met. Approval letters contain "Prior to Doc" and "Prior to Funding" conditions, which are checklists of nitty-gritty details that must be completed before the final documents are drawn and before funds are disbursed. Sometimes, one of these details derails the train.

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Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production
Good to differentiate Rick.  It really is.  A lot of realtors don't know the difference.  The consumers for sure do not.  Nice clarity.
Mar 16, 2008 01:19 PM #1
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Michael A. Caruso
Surterre Properties - Laguna Niguel, CA

Hi Rick,

This is actually very good information to keep on hand to show a client, so they understand the differences.  Thanks for sharing.  Have a great week.  Michael A. Caruso

Mar 16, 2008 01:45 PM #2
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Rick Kellow

FHA & Reverse Mortgage Expert
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