Preapproval vs. PreQualfied - What is the difference?

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Education & Training with Jody Bruns, LLC NMLS 831033
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A Mortgage Preapproval Letter vs. a PreQualified Letter - are either worth the paper they are written on?

 

Prequalified vs Preapproved

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.

 

Have a great day and for more great insight on working with a professional mortgage banker, please be sure to follow me!

 

Make it a productive day!

 

Jody

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Niche Marketing for Real Estate & Mortgage Professionals

www.JodyBruns.net

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Re-Blogged 2 times:

Re-Blogged By Re-Blogged At
  1. Debra Leisek 09/20/2016 08:44 AM
  2. Nathan Gesner 01/23/2017 09:09 PM
Topic:
Real Estate Best Practices
Location:
Colorado Arapahoe County Aurora
Groups:
Colorado Real Estate
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Colorado Real Estate
Tags:
mortgage preapproval
mortgage prequalification
jody bruns
colorado mortgage professional
mortgage preapproval vs prequalification

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Debe Maxwell, CRS
www.iCharlotteHomes.com | The Maxwell House Group | RE/MAX Executive | (704) 491-3310 - Charlotte, NC
The right Charlotte REALTOR!

Great job distinqishing between the two. I pretty much only take buyers out that are preapproved. Our time is too valuable to waste on someone who  "thinks" they can afford a home as opposed to "knowing" they can. Great information!

Sep 19, 2016 03:52 AM #1
Rainmaker
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Mary Yonkers
Alan Kells School of Real Estate/Howard Hanna Real Estate - Erie, PA
Erie/PA Real Estate Instructor

Excellent post Jody Bruns, CDLP, CMMU Saw your question in the Q&A section

Sep 19, 2016 05:01 AM #2
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Will Hamm
Hamm Homes - Aurora, CO
"Where There's a Will, There's a Way!"

Hello Jody Bruns,  Excellent blog to get out to us here in the rain.  Make it a great day!

Sep 19, 2016 05:16 AM #3
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Bob Crane
Woodland Management Service / Woodland Real Estate, Keller Williams Fox Cities - Stevens Point, WI
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Thanks for explaining this so well Jody, this should be something that every buyers agent requires their clients to read.

Sep 19, 2016 02:05 PM #4
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Bob Crane
Woodland Management Service / Woodland Real Estate, Keller Williams Fox Cities - Stevens Point, WI
Forestland Experts! 715-204-9671

Also wanted to stop by and thank you for co-hosting the Denver meetup this past month.

Thank You!

Bob

Sep 19, 2016 02:07 PM #5
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Laura Cerrano
Feng Shui Manhattan Long Island - Locust Valley, NY
Certified Feng Shui Expert, Speaker & Researcher

I was confused by this for years myself. Good on you for explaining. Glad to see you posted!

Sep 19, 2016 04:32 PM #6
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Harry F. D'Elia III
RentVest - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

There is a big difference which you have defined.

Sep 19, 2016 10:15 PM #7
Rainmaker
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L. Scott Ferguson
Ask4Ferguson - Your House-SOLD Name in Real Estate - West Palm Beach, FL
Sunny Florida Real Estate Professional

Jodi! 

Great featured post and every single word rings true! Going to forward this to everyone on my team and especially new agents coming into the office.

 

Fergie

Your Vibe Attracts Your Tribe

Sep 19, 2016 10:51 PM #8
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Richard Bazinet /MBA, CRS, ABR
West USA Realty - Scottsdale, AZ
Phoenix Scottsdale. Sellers, Buyers & Relocations

Good post Jody! Thank you. I have been making that distinction with clients and try to get all my buyers pre-approved rather than pre-qualified.

Sep 19, 2016 11:57 PM #9
Rainer
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Blatt + Cutino
Keller Williams Coastal Estates - Monterey, CA
Broker-Associate 831/206-8070*Call today*

Super duper post! I often wonder why the pre-qualification even exists. 

Sep 20, 2016 12:46 AM #10
Rainmaker
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Mike Cooper, GRI
Cornerstone Business Group Inc - Winchester, VA
Your Neighborhood Real Estate Sales Pro

Great post, Jody. I always prefer the pre-approval letter when I'm the seller's agent. At least at that point, I know the buyer has gone slightly above a phone call to a lender. 

Sep 20, 2016 01:56 AM #11
Rainmaker
844,326
Mike Bjork
SunWest Mortgage - Redondo Beach, CA

Nice job, Judy!  Definitely, everybody should strive for a full Pre Approval.  Most people don't realize the differences between the borrower's view on his/her income and how the lender calculates it.  Also, it's better to find out any surprises on the credit report sooner, than later.  Great job!

Sep 20, 2016 02:11 AM #12
Rainmaker
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Kathy Stoltman
Rockwood Realty - Ventura, CA
Ventura County Real Estate Consultant 805-746-1793

Judy, great explanation for both. I could not agree with you more. I want all my buyers to be pre-approved and would like the buyers to know what their mortgage payment would be on that pre-approval number. 

Sep 20, 2016 02:31 AM #13
Rainmaker
677,763
Debra Leisek
Bay Realty,Inc Homer Alaska - Homer, AK

we still call them 90% letters and they don't mean much in the scheme of things... always find it interesting how many people think they are important! Very Informative post about the difference between the 2!  Thank You!

Sep 20, 2016 08:20 AM #14
Anonymous
Patrick Freeze

This is a very informative article that I think anyone looking to buy should be aware of. One of the things we recommend to our landlords here at Bay Management Group is to be aware of things such as down payment requirements and what terms such as gross rental yield and capitalization rate mean when they are looking to invest in rental property. I think informing them about the actual buying process and related terms is something to do in the future. Thanks!

Sep 23, 2016 05:09 AM #15
Rainer
40,534
Christina Steinhaus
Coldwell Banker Residential Property - West Palm Beach, FL
Real Estate Agent serving the Palm Beaches

Very informative. You have meticulously described the process. I have a mortgage broker relationship that I use for each buyer I work with. I believe the buyer should be thoroughly vetted financially, prior to viewing listings.

Oct 07, 2016 11:21 PM #16
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Debbie Laity
Cedaredge Land Company - Cedaredge, CO
Your Real Estate Resource for Delta County, CO

Hi, Jody...you've done a good job explaining the difference between pre approval and pre qualification letters. Most buyers think they are the same, but really they aren't. 

Oct 11, 2016 07:26 AM #17
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Jody Bruns, CDLP

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