MORTGAGE LOANS: PRE-QUALIFIED VS PRE-APPROVED

By
Real Estate Agent with Coldwell Banker Residential Brokerage VA License# 0225201994
Most people begin the home-buying process with weeks or a few months of online searches and going to open houses before speaking to a lender or a real estate agent. On the surface, this makes sense since, with today’s internet, information is readily available for us all. Many sites like Zillow.com and Realtor.com are updated with most of the listings currently on the market. Gone are the days when agents had exclusive access to a goldmine of data.  Mortgage rates are also posted online daily. Sign up on a site like Lendingtree.com and sit back and see all the lenders' offers start pouring into your inbox.  

 
 
That’s just how it is in today’s world.  It’s convenient, there’s little or no pressure to commit to anyone or anything, and frankly, it’s something you can easily do on your own. But what happens when you find the house you’ve been looking for? More than likely, nothing will happen because, if you fit the above description of folks and are searching in a highly active housing market such as the DC Metro area, you’re already too late.  


If you haven’t hired a Realtor or spoken to a lender, then you’ve got some work to do before you can make an offer on a house:


Find a Realtor (sooner rather than later):
 
This should be first on your list. Yes, I say this because I myself am a Realtor, but also because it’s true. Even if you are months away from making a home purchase, a good agent can give you critical insight and help prepare you in advance, making the process a whole lot easier later. For example, a Realtor can provide you with information that can only come from first-hand experience and knowledge of communities, something websites cannot do. I for one, make it a point to provide my clients with information about commuting. Sure, you can find bus routes and metro locations online, but I like to share info about “slug-lines” (organized carpooling to DC).


A good Realtor will be able to give you several good recommendations for lenders to speak to. Go ahead and search online but an agent can recommend a few mortgage lenders based on experience and how well they work with clients.
 
An agent has access the network of local Realtors who may know of homes coming to market before they are listed anywhere. Just as you may not be ready to buy, there are homeowners that aren’t quite ready to sell yet but plan to in the near future. It would be nice to know who they are, right?
 
Depending on your time-frame, one of the first things a licensed Realtor would have you do is get pre-qualified or pre-approved for a specified mortgage loan amount by a broker or lender, which leads me to the next important item on the list.
 
Find a Mortgage Lender:
 
Do your research on this one but don’t forget to ask a trusted Realtor to recommend a few reputable mortgage loan lenders. Your social security number, W-2s or recent pay stubs, and a short discussion over the phone with a mortgage loan originator can get you pre-qualified within as little as an hour after a credit score check.
 
But wait ......Pre-qualification and pre-approval are not the same:
 
Eddie Jackson, Producing Manager at Flagstar Bank in Washington, D.C., says that “most buyers and agents at this point know to ask for a pre-approval.  However, they are typically more focused on the wording than the actual meaning of the term.  Any responsible loan officer is going to review income and assets to some degree.  Most loan officers are not formally trained at doing this properly.  As a result, the accuracy of their conclusions may vary.”  
 
Home loan pre-qualification and pre-approval involve two different processes and it’s important to understand the differences.Mortgage loan officers typically issue loan pre-qualification letters which show your agent, the seller, and seller’s agent that you are creditworthy and are serious about buying a home. Note, however, that these letters are not approvals. “Despite this,” says Eddie Jackson, “some loan officers can issue "pre-approval" letters.  The most reliable pre-approval letter is one which is issued by an underwriter.  While it isn't necessary to have one in every transaction, it's particularly important if someone receives over 25% of income from commission, is self-employed, has credit concerns or is pushing the envelope regarding debt to income. Anytime you can get a lender to have an underwriter to review situations similar to those.  A failure to do so can always result in a loan that doesn't go well.”



 
 
Mortgage loan originators and processors cannot issue pre-approval letters - only a mortgage underwriter can pre-approve you for a home loan.  And it’s a good idea to have a valid pre-approval; it is the best tool you can have when looking for a new home.  While a pre-qualification may come much faster, normally within a few hours,  a valid pre-approval takes much longer time, 30-45 days depending on the type of loan and size of your down-payment, and is underwritten by an authorized underwriter who is the final person that says your loan is approved. Whether you do get it done before or after you find a home, it must be done. But getting upfront pre-approval has great advantages.  With a valid pre-approval by an underwriter in hand, all that’s left for you to do is find the home you’re approved to buy, have it appraised, and in most cases, close in just a few days. Had you only been provided with a pre-qualification letter, the stated amount of your loan qualification may change after it has gone through the underwriting process, after a more detailed look at your finances takes place. An underwriter will ask for W2’s, Bank Statements, tax returns, letters of explanation to items on your credit report, etc.



Imagine this scenario:
 
You’ve been quickly issued a pre-qualification letter for a $500,000 mortgage, you’ve successfully negotiated to buy a home for $480,000 and close the deal in 30 days. The underwriting process begins.  You’ve been asked to submit your most recent W2’s, pay stubs, tax returns, statements, letter from your employer, and more. Your tax returns match the W2’s you originally submitted for the pre-qualification letter, however, it now comes to light that you have taken unreimbursed expense deductions that effectively lower the amount of your disposable income. The underwriters see this and, with 2 weeks into the process, determine that you actually cannot afford to buy the home and tell you that you are now approved up to just $450,000 and a certain property value. Perhaps, if you still want the house, you’ll need to increase your down payment. Many deals crash this way. Sure, you may also find yourself in the good position of being approved for much more after the underwriting process, but you would have wished to know that upfront.
 
The other advantage of first going through underwriting is leverage. Even if you find yourself in a bidding war over a home, you’ll have the advantage of telling the seller that you can go to settlement within a maximum of a few days because your underwriting is out of the way and your deal is a sure thing...now. You’re subsequent negotiations over who pays for closing costs, inspections, and repairs will have a better chance of going your way - Leverage. In essence, the ability to close quickly is a way to get a great deal.
 
 
Summary:
 
Ask your Realtor for a list of lenders with great reputations and insist that your mortgage broker/lender issues a  pre-approval that has been reviewed by an authorized underwriter.

 

This post is also available on my blog at www.BeltwayLand.net

Comments (14)

Sybil Campbell
Fernandina Beach, FL
Referral Agent Amelia Island Florida

Nader Abed,  Welcome to Active Rain and congrats on your first blog post. This is a great place to meet, learn from and interact with awesome professionals.

Apr 05, 2017 08:11 PM
Nader Abed

Thanks Sybil, I'm looking forward to communiaction and a wealth of info. 

Apr 05, 2017 08:24 PM
Michael J. Perry
KW Elite - Lancaster, PA
Lancaster, PA Relo Specialist

We always want our buyers to be Pre-Approved ! Very competitive market !

Apr 05, 2017 08:43 PM
Melissa Jackson
Century 21 Alliance Properties - Azle, TX
Helping You Make The Right Move

Pre- Approval will make their home buying experience more favorable. 

Apr 05, 2017 08:58 PM
Barbara Todaro
RE/MAX Executive Realty - Retired - Franklin, MA
Previously Affiliated with The Todaro Team

Good mornng, Nader Abed every buyer and seller deserves proper representation, and a well-versed Realtor will provide that.... those in the Northern Virginia and DC area would be wise to contact Nader Abed for guidance...

Apr 06, 2017 03:01 AM
Nader Abed

Thank you, Barabara! 

Apr 06, 2017 06:42 AM
Barbara Todaro
RE/MAX Executive Realty - Retired - Franklin, MA
Previously Affiliated with The Todaro Team

and welcome to ActiveRain...it's a great place to learn, share, market and network.... and I hope you enjoy it and benefit from all of it...

Apr 06, 2017 03:02 AM
Kat Palmiotti
406-270-3667, kat@thehousekat.com, Broker, eXp Realty - Kalispell, MT
Helping your Montana dreams take root

Welcome to ActiveRain. I agree with your post. Knowing how much a buyer can spend up front can help alleviate problems later on! 

Apr 06, 2017 03:20 AM
Nathan Gesner
American West Realty and Management - Cody, WY
Broker / Property Manager

The pre-approal is where it's at and your article clearly explains why, Nader Abed . Welcome to activerain!

Apr 06, 2017 04:22 AM
George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Nader welcome to ActiveRain and congratulations on posting your first blog on this site.

Apr 06, 2017 02:27 PM
Nader Abed

Thank you George. Much appreciated.

Apr 06, 2017 05:41 PM
Bob Crane
Woodland Management Service / Woodland Real Estate, EXP - Stevens Point, WI
Forestland Experts! 715-204-9671

Good advice Nader, I just had a two week discussion with a veteran agent who insisted that these were the same thing.  It took a lot of articles forwarded to her to convince her of the difference.

Apr 06, 2017 11:00 PM
Nader Abed

Thanks, Bob. Sometimes it takes experiencing the difference between the two first-hand like I did.   

Apr 07, 2017 06:26 AM
Bob Crane
Woodland Management Service / Woodland Real Estate, EXP - Stevens Point, WI
Forestland Experts! 715-204-9671

Welcome to Active Rain, looking forward to reading many more of your posts, let me know if there is anything that I can do to help as you get started here.
All the best of success to you.
Bob

Apr 06, 2017 11:00 PM
Gita Bantwal
RE/MAX Centre Realtors - Warwick, PA
REALTOR,ABR,CRS,SRES,GRI - Bucks County & Philadel

Welcome to active rain. Good luck in achieving your goals on active rain 

Apr 08, 2017 08:12 AM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Welcome to ActiveRain Nader Abed.

This is The Best place to learn, share and build relationships with like-minded professionals.

Apr 09, 2017 11:04 PM
Praful Thakkar
LAER Realty Partners - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

I always wonder why the buyers do this -

"Most people begin the home-buying process with weeks or a few months of online searches and going to open houses before speaking to a lender or a real estate agent."

 

Apr 09, 2017 11:05 PM
Carol Williams
Although I'm retired, I love sharing my knowledge and learning from other real estate industry professionals. - Wenatchee, WA
Retired Agent / Broker / Property Manager

Hi Nader,

Welcome to ActiveRain. It is a wonderful place to reach the public through your blog and to learn from other industry professionals.  We all love sharing our knowledge and learning from each other.  

I encourage you to interact in the community through reading and commenting on other blogs and in the Q&A section.  Life long friends are made here.    

May I encourage you do research the benefits of upgrading your membership to "Rainmaker"?  There are additional benefits, the greatest of which is getting your blog posts indexed to the public.  Here is a link to the "How To Get Started On AR" page.  

Apr 27, 2017 01:55 PM