We do admit there are some confusing terms in the mortgage industry. It’s not on purpose and mortgage lending isn’t alone as it relates to industry jargon. Two of the sometimes confusing terms are “pre-qualification” and “pre-approval.” There is a distinct difference and could determine whether or not the sellers accept your offer or someone else’s.
Pre-Qualification vs. Pre-Approval
A pre-qualification is more of an informative option after a conversation with a loan officer. A loan officer can issue a pre-qualification letter after a five-minute phone call. The loan officer will ask you how much you make each month and how long you’ve been with your current employer. If you’re self-employed you’ll need to have at least two years of self-employment. The loan officer will also ask how much money you have available for a down payment and closing costs as well as a general question about your credit history. After the conversation, you can request a prequalification letter. But unless it’s a preapproval letter, you may not even be able to get into a real estate agent’s car.
When first shopping for a home you’ll also need a good real estate agent. Your agent will consider your needs and wants and find homes that meet your requirements. Don’t make the mistake of searching for a home without an experienced real estate agent. If you need a referral for a great agent I can help.
But until you get a pre-approval letter from a lender your agent may not put too much effort until you do the same. A pre-approval letter shows you’re serious about buying a home and your loan application has been accepted, reviewed and pre-approved by your mortgage company. All you need to do is find a property.
The Pre-Approval Process
A pre-approval will not just ask how much you make each month but ask for your two most recent paycheck stubs and W2 forms. You’ll also give the loan officer permission to pull a credit report and obtain credit scores. Further, you’ll also provide your most recent bank statements showing you have enough money in the bank for a down payment and closing costs.
Your preapproval letter will state something to the effect of, “We have issued your preapproval based upon the receipt of your loan application, review of your credit report and credit scores, income and employment verification and bank statements showing sufficient funds to close” or something similar.
The difference between prequalification and preapproval is the degree of verification. A pre-qualification simply verifies who you are. A pre-approval is a letter from a lender that states your income, credit and assets have been verified and all you need to do is find a home.
The Bottom Line
If you’re a seller and you have two identical offers and one offer has a preapproval letter and the other does not, which do you think you’re likely to accept? That’s right. The one with no strings attached. The one with a preapproval letter. Get started with yours here.