How Pre-Approvals and Pre-Qualifications Differ

How Pre-Approvals and Pre-Qualifications Differ

The terms pre-approval and pre-qualification have at times been used interchangeably as if they have the same meaning; and for those who may not be as interested or sophisticated in matters relating to the purchase of real estate (both residential and small commercial), these terms may indeed have the same meaning. However, to permit such use of either term would be a misuse of both, simply because each is defined in its own respect and therefore serves distinctively different purposes in the home buying process.

The Pre-qualification or pre-qual

Among the first steps taken – or should be taken – by a prospective home buyer, or anyone interested in purchasing small commercial real estate, is to determine whether or not s/he is qualified to make the purchase. As would be expected with any such “big ticket” item there are a number of things to consider in this very preliminary process which includes, income consisting of personal earnings for the home purchase, as well as rental income generated from the small commercial property, if such a property is indeed the subject of a buyer's interest.

The pre-qual need not be issued by a real estate or mortgage services professional since the prospective buyer can make this determination with the use of a few paystubs to calculate gross monthly income; free credit report (one is available annually) from the credit bureaus; amount of cash set aside for the purchase (need to review of bank statements?); interest rate(s) being offered by lenders (accessed on the Internet); a mortgage calculator which can easily be accessed on the Internet, and a pen or pencil along with writing pad – or for those more comfortable with computers – a spreadsheet or one of the many available editors with which to begin the calculations.

Quite frankly the above items, in the hands of a prospective buyer willing and able to do the calculations, could be used to generate a pre-qualification which would be useful only to the individual who created it, since a lender would not be obligated to honor this buyer-generated pre-qual or any other pre-qual, despite where is was generated or by whom. However there are many prospective buyers who prefer obtaining a pre-qualification from a real estate agency, mortgage broker or mortgage lender (on their respective stationary), because they either lack the time, confidence or willingness to prepare it themselves.

A pre-qualification from any source is simply an estimate. According to the website Mortgage 101, a “...mortgage loan pre-qualification is simply an estimate of how much house you can afford...” and how much money a prospective lender “might” be willing to lend you, even if the pre-qual is written on that lender's stationary. Another version of what a pre-qualification is was put this way by the folks at Good Mortgage: “A pre-qualification is a determination on the amount of credit the prospective applicant would likely qualify [for]”. Key word here is “likely.” Pre-qualifications are useful in letting prospective buyers know approximately how much house they might qualify for based on how much financing a lender might provide.

The Pre-approval

Unlike the pre-qual, the issuance of a pre-approval will often be by a bank, mortgage lender, or – in some cases – a mortgage broker authorized by a mortgage lender via an agreed-upon process or “dedicated” computer program provided by that lender. This means that a pre-approval in the possession of any prospective buyer provides more of an assurance to that buyer that s/he will secure financing for a home purchase than a pre-qualification could; and while it is true that a pre-approval is indeed subject to a variety of terms and conditions, including receipt by the lender of a satisfactory appraisal and clear title report, the holder of this document is closer to being approved for the purchase a home or investment property than when s/he is without it.

This, a definition supported by the Federal Reserve and provided by the folks at Good Mortgage, represents what might be the most compelling difference between a mortgage pre-qualification and a mortgage per-approval:

A pre-approval is a written commitment issued by a lender after a comprehensive analysis of the creditworthiness of the applicant, including such verification of income, resources, and other matters as is typically done as part of a normal credit evaluation program.

The pre-approval process is, as evidenced by the above statement, a more thorough look and closer examination of the prospective buyer's documentation, credit history, representations and other important elements of what might be required for the issuance an actual mortgage loan commitment and subsequent mortgage closing. The pre-qual is not.

Finally if you, as an individual intent on buying a home, have been setting aside money for a down payment and you believe your earnings, credit and level of outstanding debt are such that you could comfortably afford to make a mortgage payment every month, you might be able to run your own pre-qualification numbers based on the process discussed in paragraph three above. Once you are comfortable with the results and satisfied that what you thought all along as being correct, you will probably be more prepared with the documentation that will be required to gat a pre-approval from a mortgage services professional of your choice.