Mortgage Pre-Approval versus Mortgage Pre-Qualification
Is there a difference between a Mortgage Pre-Qualification letter and a Mortgage Pre-Approval letter?
(Originally written and posted in 2009 and updated now in August, 2019, with updates in Italics)
Considering taking advantage of
the favorable mortgage interest rates ? mortgage interest rates below 4%? Considering taking advantage of the drop in real estate prices in 2009? Considering beginning the search process to purchase a home?
Before taking the time to drive around looking for a home, before taking the time to visit Open Houses and before taking the time to meet with a REALTOR® to look at homes, meet with a Mortgage Lender to review the mortgage process and obtain Mortgage Pre-Approval. The reality is that most all buyers need to obtain a mortgage to buy a home. Since so few buyers are able to think about buying a home and paying cash, wouldn’t it make sense taking care of the mortgage financing
financial details first?
Price range is determined by the down payment plus the mortgage amount to be borrowed. Buyers know how much of their savings they have available for a down payment. The mortgage amount is determined by income qualifications, credit score and other important criteria, and information like this must be verified.
Not only is obtaining Mortgage Pre-Approval important to the buyer themselves, but it becomes even more important in the process of searching for a home and making contract offers. Most experienced REALTORS® require their clients to have Mortgage Pre-Approval and, more importantly, very few home sellers will even consider a contract offer without Mortgage Pre-Approval.
In the current real estate market with a shortage of listing inventory and homes for sale, there is a very strong possibility that there will be more than one buyer interested in the same home and there will be multiple contract offers submitted to the home seller. Which buyer would appear to be better the better buyer to the owner, one with Mortgage Pre-Approval in hand or one with a simple Pre-Qualification letter?
Many buyers have asked, “is there a difference between a Pre-Qualification letter and a Pre-Approval letter” or does it make a difference if I have Mortgage Pre-Approval or Mortgage Pre-Qualification”? These terms appear to be similar, but are in fact different. Not only do they cause confusion for home buyers, but there seems to be many interpretations from those in the real estate and mortgage industry as well.
Speaking as a REALTOR®, the difference is documentation and verification. In other words, is the buyer providing copies of income pay stubs and bank account statements to the Mortgage Lender in the pre-approval process or is the Mortgage Lender simply relying on verbal information provided by the buyer? More often than not, the difference between the two terms is that one is issued without any verification of information provided by the buyer and the other starts with the buyer providing written documentation
of for all information submitted. While neither is a considered to be a mortgage commitment, nor a written mortgage guarantee, obtaining a Mortgage Pre-Approval letter is more preferred than obtaining a Mortgage Pre-Qualification letter.
Based upon my experiences in selling real estate and helping buyers obtain mortgage financing, Mortgage Pre-Qualification is generally a process where a buyer contacts a Mortgage Lender/Mortgage Rep, often on the phone, who then asks the buyer to provide
some information such as their current address and how long living there, social security number in order to obtain a credit report, down payment amount and annual income. I assume expect a credit check authorization form is signed by the buyer and faxed to the Mortgage Lender. After the credit check is ordered and received by the Mortgage Lender, the Mortgage Rep then estimates the amount of mortgage the buyer can afford and sends(via fax or email) a letter to the buyer with the title Congratulations, You Are Pre-Qualified, for a mortgage loan in the amount of $___________ and a purchase price of $__________. This is usually done within a half hour or so of the initial phone call, and at best can be described as an estimate of borrowing ability, and not Mortgage Pre-Approval.
In the Pre-Qualification letter, varying type disclaimer information is always included such as: subject to a formal mortgage application and payment of application fee, subject to verification of employment, subject to verification of assets, subject to credit review, subject to mortgage underwriting guidelines, interest rate to be the prevailing rate of interest for the mortgage type applied for, among many other subject to statements. In other words, we will give you a mortgage when we see that the information is correct.
What kind of problems could arise when a formal mortgage application is submitted by the buyer after they’ve obtained a Mortgage Pre-Qualification letter like that the one above
one? The mortgage application process involves somewhat standard underwriting criteria and guidelines for each particular type mortgage, whether VA, FHA, Conventional, USDA and other variations of each.
The Buyer does have a Pre-Qualification letter, but how reliable is it if important information such as income, debts and assets, while assumed to be correct and accurate, have not been verified with copies of pay-stubs, savings account statements, charge card statements, etc.? Yes, it is possible that the buyer provided correct information and will obtain a mortgage commitment when a mortgage application is submitted. However, there are many circumstances where even though the information verbally provided is accurate, certain other details are not mentioned which may have a negative impact on the mortgage approval process.
Details like income being received off the books, down payment being borrowed(not gifted from a family member), savings for the down payment only but no other assets for closing costs or inconsistency in work history to name just a few situations that can cause problems in obtaining mortgage approval. While Pre-Qualification letters like the previous example are common, not all Mortgage Lenders provide Pre Qualification letters in that manner.
Since the mortgage application and approval process involves a credit check, income verification and asset verification among other criteria, many Mortgage Lenders require a more thorough process in providing Mortgage Pre-Approval. In addition to obtaining a credit report, many Lenders require the buyer to provide proof of two years of income, pay-stubs or income tax forms, copies of bank statements and copies of charge card statements.
When all the information is complete and the credit report is obtained, it is then submitted to the Mortgage Underwriter for review and approval, who then issues the Mortgage Pre-Approval letter. In fact, the Mortgage Pre-Approval letter is worded something like this: Congratulations, You Are Pre-Approved for a mortgage loan in the amount of $________ and a purchase price of $__________ subject to a Contract of Sale and a satisfactory Bank Appraisal on the home being purchased. While more time consuming than the previous pre-qualification practice discussed above, not only is it more thorough and more reliable, it also provides a shorter mortgage application time process and provides the ability for a fast closing when one is desired.
Consider the advantages of this type Mortgage Pre-Approval. First of all, there is the confidence for the buyer in obtaining a written mortgage commitment for the home they have just signed a contract for. and the home they have already made an investment in; hiring an Attorney for contract review(sometimes required by State Law) and hiring a
n Home Inspector to perform the Home Inspection, Termite Inspection, Radon Inspection and any other required inspections. Needless to say, I can’t even count the number of real estate transactions I’ve heard about that fell apart after the buyer paid for the bank appraisal and all the inspections ., approximately $1,200- $1,500 not including a Due Diligence Fee(depending on State). And these transactions were cancelled due to the buyer not being able to obtain mortgage approval, even with a Pre-Qualification letter. It just doesn’t make sense!
Even more important is the benefit in negotiating with a seller in the purchase of a home, something that can make the difference of being the buyer who gets the signed contract or being able to negotiate a better price. The Mortgage Pre-Approval provides comfort to the seller and REALTORS® in knowing that they have a serious buyer and one who has already taken the most important step in buying a home, arranging the financing first!
Help yourself negotiate for a better home purchase.
Contact a REALTOR or Mortgage Lender to discuss obtaining Mortgage Pre-Approval before you get in the car to look at houses! It is worth the effort, trust me!