A Mortgage Preapproval Letter vs. a PreQualified Letter - are either worth the paper they are written on?
There's not a lot of difference between a prequalification letter and a preapproval letter. While there are some legal distinctions, in practice both terms refer to a letter from a lender that says the lender is generally willing to lend to a client, up to a certain amount and based on certain assumptions. This letter is often required when a prospective home buyer is looking to submit an offer to purchase real estate because it gives the seller confidence that a prospective buyer will be able to obtain the necessary financing to purchase the property. It is NOT; however, a commitment to lend. A property appraisal, acceptable title commitments and final verification of employment and assets will always be required prior to final approval.
As for my practice as a mortgage professional, I have a clear distinction between a Preapproval and Prequalification. A Mortgage preapproval and prequalification are NOT the same thing. A preapproval is more indepth than the prequalification as the mortgage professional has actually pulled the consumer credit report; verified financial documentation including income and assets.
A prequalification is simply a 'running of the numbers' based on the information provided by the client as well as a general assessment of where the client believes their credit to be. A prequalification letter is usually not worth the paper it's written on as it is only an initial assessment.
The key difference in my mind, is that a Preapproval letter provides a much stronger indication to the seller that the buyer can close on the purchase transaction. The borrower has already provided documents, a full tri-merge credit report was reviewed, typically automated underwriting findings are available and a complete overview of the debt to income ratios and qualification guidelines have been completed. It streamlines the whole mortgage approval process making for a much more enjoyable and smooth transaction for all parties involved.
One of my biggest pet-peeves as a professional mortgage banker is getting a call from a frantic buyer who is already under contract and during the approval process their loan is being denied because of an issue that should have been clearly identified by the mortgage lender had they done a complete and thorough preapproval. This avoids so many headaches and sleepless night - a first time homebuyer should be excited and enjoying the process. They shouldn't be feeling like throwing up every time their lender calls or sends them an email!
Many times a potential homebuyer will wait to get a preapproval letter until they are ready to begin seriously shopping for a new home. I suggest getting preapproved earlier in the process as a way to spot and overcome any potential issues with regards to credit, income or assets.
For example, a recently divorced client who needs to use divorce income for qualifying purposes (either maintenance or child supporty typically) may be prequalified with a general assessment of the numbers. However, during the preapproval process it may be determined that he/she won't qualify for a mortgage loan until they have received the income for 3-6 months depending on the loan program. Or if they have been receiving the income for the minimum period required but there is no 3 year continuance of the income, it then becomes unqualified income for mortgage financing purposes. There are so many pieces to fit together that you should require your mortgage professional to do a full preapproval and not a general assessment.
Additionally, if a buyer is very conscious of the potential new housing payment (which they should be) and/or are very tight on debt to income ratios - I recomment a final preapproval letter referencing the purchase offer price and property address be submitted with the offer. This allows the lender re-run the inital preapproval with property specific numbers including offer price, verified property taxes, any verified HOA assessments, etc. A buyer writing an offer on a condominium with a $275 monthly assessment may not only get payment shock but not qualify for the final loan approval.
As a general rule and providing additional weight to my preapproval letters, I will personally reach out to the seller's agent and verify the strength of my clients assuring the seller and agent that I have done my due diligence and can assure them of the ability to close the loan on time per the purchase contract.
In general, don't worry about which word lenders use. Some lenders may use the word "prequalification," while other lenders may call the letter a "preapproval." In reality, a mortgage lender's processes vary widely, and the words they use don't tell you much about a particular lender's process. The important thing is that the letter you receive provides enough information for sellers to take it seriously.
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