Pre-Approved Vs. Pre-Qualified - What's the Difference?
Preparation is the single most important step you can take to ensure a smooth financing process. Unfortunately, confusion between these two terms leads many borrowers into believing they are prepared and ready to buy, when in actuality they are not.
According to Ellie Mae’s Origination Insight Report for Sept 2016, less than 75% of all loan applications close. We believe a large portion of these are a result of borrowers that either weren’t or were improperly Pre-Approved.
So what’s the difference?
See below for a detailed description of the Pre-Qualification Vs. Pre-Approval process.
A mortgage Pre-Qualification is a fairly simple overview that a borrower has with a bank agent or lender in which they provide some basic information regarding their overall financial picture, including, debt, credit, income and assets. With this information, the lender or bank agent then tells you approximately what loan you would qualify for and provides you with a “pre-qualification” letter.
It is typically done with a conversation over the phone or internet and there is usually no cost involved and no or very little documentation is provided.
A Pre-Qualification is useful as a conversation point where you familiarize yourself with different loan products and programs, and as a means to give you a general idea of what you might qualify for.
The problem with a Pre-Qualification is that it is based off of information verbally provided and is not actually reviewed by an Underwriter. Therefore the numbers used for income/asset/debt and credit calculation & analysis are not the same numbers that will be used to approve your loan.
To make matters worse, many bank agents, lenders, and loan officers provide flowery “Pre-Qualification” Letters that look and read as if the borrower has been underwritten and fully pre-approved. Unsuspecting realtors and sellers then accept these letters as proof of creditworthiness when reviewing and accepting offers.
What then often happens is that as the loan goes through underwriting, and the information is reviewed for conformity to Underwriting guidelines, the numbers change and the loan is denied. This leaves the borrower scrambling to either restructure the loan or withdrawal the offer after time and money has been spent on an appraisal and inspection and a bitter taste is left in everybody’s mouth.
At Foundation Mortgage we feel that Pre-Qualifications are worthless. Our licensed, professional Mortgage Bankers offer COMPLETE & COMPREHENSIVE PRE-APPROVALS!
Don’t make this common mistake! GET PRE-APPROVED NOT PRE-QUALIFIED!
At Foundation Mortgage, approximately 90% of our Pre-Approved Borrowers Close!
A Mortgage Pre-Approval is a much more robust review of your credit worthiness than a Pre-Qualification. A proper Pre-Approval involves:
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Review of your Credit Report
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Make sure it is a tri-merge report and all 3 credit bureaus are reviewed. Many companies will pull just a single bureau – (i.e. Equifax) and qualify you based off of a single credit score. They do this because it costs less than ordering a traditional credit report from all 3 credit bureaus. The mistake with this is that the credit score is likely inaccurate, since underwriting will use the middle of your 3 credit scores as your qualifying credit; and because there are possible missing credit trade lines or derogatory information that appear on the other credit bureaus, but not on the single one being used.
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Always request that your Pre-Approval be based on your complete tri-merge credit report!
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Review of your Income Documents
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Paystubs
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W2s
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Tax Returns
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Review of your Asset Documentation
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Bank Statements
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Brokerage Accounts
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Retirement Accounts, etc.
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Confirm the amount of monthly Debt associated with other items, i.e.
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Real Estate Owned
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Loans Co-signed for and not showing on your credit report
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Other Obligations
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Providing this information at the beginning of the process, and having it professionally reviewed prior to making your offer will help avoid the dangers and frustrations that people that get pre-qualified encounter.
1. Accurately Determine What Loan Type You Qualify For
FHA, VA, Conventional programs have different rates and costs. Knowing which type of loan you qualify for will help you better understand what your monthly payment and closing costs will be.
2. Accurately Determine How Much Loan Amount You Qualify For
3. Accurately Determine What Your Monthly Payment and Closing Costs Will Be
- Can you afford the house you want to buy?
- Are you numbers accurate?
- What will your monthly payment be?
- What will your closing costs be?
- Different Loan Types have different timing requirements
- Knowing how much time you’ll need will help you and your realtor make a better offer with realistic timelines
5. Give Yourself Time to Fix Problems Before You Are Under Contract
A thorough Pre-Approval will identify potential problems with your application. Maybe a higher credit score would get you a better rate, or waiting 2 months for your next raise will allow you to qualify for more house, or paying down debt will put you in a better position.
Get Pre-Approved and give yourself time to work on the items to strengthen your application!
Get Taken Seriously By Agents & Submit Stronger Offers!
Buyer’s Agents
Coming to the table with fully Pre-Approved will get Realtor’s attention. Knowing that you have done your home-work, prepared, and have a strong Mortgage Banker behind you will get Realtors to take you more seriously and make them more willing to show you properties and recognize you as a “serious buyer”.
Seller’s Agents
When you get to the point of submitting an offer, the Seller’s Agent will favor your offer over competing offers not Pre-Approved. Helping you beat out your competition for the house & price you want!
