Pre-qualification vs Pre-approval are terms used in home finance to determine how qualified a borrower is. Many applicants I have met with believe the two terms to be synonymous when nothing could be further from the truth. The strength of you offer, as viewed by the seller, could be determined by your pre-qualification or pre-approval letter.
The Mortgage Application
When you first start exploring home finance options you will likely start by scheduling a consultation with a mortgage professional and complete the initial mortgage application. During the application you will be asked questions such as, how much money you earn, how much money you have in the bank, and whether you currently rent or own. The mortgage application goes into extreme detail about your financial past and current living situation. We have coined the term, “financial colonoscopy”.
When all of the information is gathered the mortgage consultant will pull your credit with the three major credit bureaus; Experian, Equifax, and TransUnion. The credit is reviewed in detail and you will be given a credit score to represent the likely hood that you will repay the money you intend to borrow. At this stage in the process you will be issued a pre-qualification letter the tells you how much money and which loan program you are likely approved for. In some cases you may be declined. An experienced mortgage professional can offer guidance to improve your credit score and improve your chances of buying a home in the future.
Although you receive a pre-qualification letter this does not necessarily mean that you are approved for the loan. Mortgages are complex financial products that have hundreds of guidelines and regulations that have to be met. The only way to determine if all of the requirements are met is to provide all of your financial documents. To learn about which documents might be required, click here.
After reviewing your credit profile and mortgage application, the mortgage consultant is likely to provide a list of needed documents. Each loan program is different so it is imperative that the application be reviewed thoroughly to insure the proper documentation is gathered. Not every application or financial situation is the same and each client may have to provide something unique to their situation. Some examples include; a child support order, divorce decree, bankruptcy discharge, or even the name and number of your current landlord.
The pre-qualification you received is only an estimate of what you will be approved for and not to be taken as a commitment to lend. The only way to gain better clarity is to provide all of the requested documents for to your mortgage professional as soon as you can. After providing the documentation your mortgage professional will review the documents and make sure that the information on the application matches the documents you provide. Once reviewed, the mortgage company will “upgrade” your pre-qualification letter to a pre-approval letter.
The pre-approval letter carries more weight as it implies that the mortgage company has been able to review the documentation and determined that you are extremely likely to be approved. The value of the pre-approval in the home shopping process should not be discounted. When you find a home you would like to purchase you will make an offer on the home. By providing the Pre-approval letter, the seller will have more confidence that you would be able to buy the home. If you never take that next step, your offer will likely be declined or turned down for a better offer with a pre-approval letter. In some cases sellers have taken less money because the pre-approval letter carries more weight than the pre-qualification letter.
By understanding pre-qualification vs pre-approval you will be better prepared to begin the home shopping process.If you choose a capable mortgage professional, they should know what documents to obtain based on your current situation. Horror stories exist of a pre-approved client getting denied later in the process because the application was not taken with enough detail or the loan officer did not understand all of the guidelines associated with the loan program offered. Work with a mortgage professional that does business the right way and you will be able to rest easy knowing that you have a pre-approval letter. Make sure to ask your mortgage professional questions about their experience and if they have worked with your loan program often. Would you take your Audi to a Ford dealer for repairs? The same concept exists for mortgage programs. Less successful loan officers have a hard time saying no to a program they don’t understand because of the opportunity for commission where an experienced professional will openly explain the programs they have experience with and the programs they feel less confident with.
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