Why Your Pre-Approval Isn't Real

Mortgage and Lending with Guaranteed Rate NMLS# 2611 NMLS #151088

The topic of a Borrower or Real Estate Agent requesting a Pre-Approval instead of a Pre-Qualification comes up quite frequently.  The terms have been used so interchangeably for so many years now, so it is bound to lead to confusion.  In today's market, you will most likely not be getting a true Pre-Approval letter though.  Instead, a Pre-Qualification will be given to the Borrower. 


Most lenders quit issuing true Pre-Approvals several years ago for a variety of reasons.  One main reason for the change was to be in compliance with applicable Federal laws.  RESPA laws that govern the GFE changed January 1, 2010 .  When that change took effect, a GFE became more of a binding contract that it ever was.  That gives a lot of concern in that there is very little and sometimes no room for changes in fees that are initially disclosed to the borrower even though the lender does not have factual data at that time to give out accurate fees. 


This has the potential to be a significant financial risk to the lender when a property has not yet been specified.  The new GFE only allows tolerances for certain fees to change.  Not having the real specifics at the time of loan application has the potential for a regulatory issue for the lender. 


Also, the FDIC website (section 203.2) has a very specific definition of a Pre-Approval.  The FDIC states that a Pre-Approval cannot be subject to certain other additional approval conditions.  Basically, nothing other than property associated conditions (i.e. sales contract, appraisal, insurance, title, etc) and no material changes in a borrowers qualifications can apply to a Pre-Approval once it is given.  The CFPB is also very concerned with a Borrower not being misled by a Loan Officer on the difference between the two.


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


A Loan Officer who knows underwriting guidelines inside and out and what they are doing, can issue a Pre-Qualification letter that is as good as a Pre-Approval letter.  Nothing prohibits a Loan Officer from completing a thorough review of a Borrower's credit report, pay stubs, W-2's, Federal Income Tax Returns, and bank statements prior to issuing a Pre-Qualification.  I also wrote a more in depth article on Pre-Qualifications a few years ago.



I am sure that there are many Loan Officers still issuing Pre-Approval letters today that have not first been reviewed by an Underwriter.   Just because you may receive one, that does not mean that they are being compliant in doing so or giving anything other than what is essentially a Pre-Qualification.  Most of these will probably come from rather small mortgage companies or mortgage brokers.  This will likely be due to them not having a large and experienced Legal/Compliance Department to keep up with the ever changing legal environment that lenders must navigate through. 


A Borrower or Real Estate Agent should not expect anything other than a Pre-Qualification letter. 



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It is always advisable to consult with a knowledgeable lending professional when navigating today's turbulent mortgage and real estate marketplace.  I am committed, qualified and equipped to help you evaluate your options!


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All mortgage lending guidelines are accurate at time of post, but are subject to change without notice.  Please call for the most current information.



Comments (9)

Randy Mitchelson,APR
Marketing Advisor & Squeeze Mortgage - Bonita Springs, FL
First Impressions are made at First Click

Preapprovals were never worth the paper they were written on.

Glad to see them die.

Jan 11, 2014 12:49 PM
Cathy Wolters
Wolters Realty & Property Management Company - Cocoa, FL
Your Brevard County Property Management Expert

Good to know, thanks for sharing that. 

Jan 12, 2014 12:40 AM
Rodney Mason, VP of Mtg Lending
Guaranteed Rate NMLS# 2611 - Atlanta, GA

Randy....Still garbage in, garbage out.

Cathy....You are very welcome.

Jan 12, 2014 03:23 AM
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

Rodney, this is valuable information that Realtors® need to know when working with their home buyers. I like that you explained what the difference is and why.

Jan 12, 2014 04:32 AM
Rodney Mason, VP of Mtg Lending
Guaranteed Rate NMLS# 2611 - Atlanta, GA

Pamela....Thanks for the prompting for the need of this one.

Jan 12, 2014 11:43 AM
Rosie Crow
Serving Sugar Land, Richmond, Rosenberg, Missouri City - Sugar Land, TX
Exceeding Expectations. Delivering Results

Thanks for sharing. These terms are used interchangeably but both have different meanings. Thanks for clarifying.  You bring up a good point about the GFE changes in 2010. So even though a borrower provides supporting documentation to lender when getting pre-approved, that "pre-approval" letter is actually a pre-qualification letter.

Jan 12, 2014 12:35 PM
Rodney Mason, VP of Mtg Lending
Guaranteed Rate NMLS# 2611 - Atlanta, GA

Rosie.....You are correct on all points.

Jan 14, 2014 11:52 AM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Rodney, it's really a tough job for lender now-a-days - and you are right, pre-qual letter is always mistaken for pre-approval letter.

Mar 11, 2014 02:01 PM
Rodney Mason, VP of Mtg Lending
Guaranteed Rate NMLS# 2611 - Atlanta, GA
Praful.... a lot of people often forget about the regulatory side of the lending world. Just because some Loan Officers or mortgage companies do something, that does not make it correct.
Mar 12, 2014 01:12 AM