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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