Mortgage Pre-Qualification vs. Pre-Approval: What’s the Difference?

pre approval

By: Lisa Gordon

When buying a home, cash is king, but most folks don’t have hundreds of thousands of dollars lying in the bank. Of course, that’s why obtaining a mortgage is such a crucial part of the process. And securing mortgage pre-qualification and pre-approval are important steps, assuring lenders that you’ll be able to afford payments.
However, pre-qualification and pre-approval are vastly different. How different? Some mortgage professionals believe one is virtually useless.

“I tell most people they can take that pre-qualification letter and throw it in the trash,” says Patty Arvielo, a mortgage banker and president and founder of New American Funding, in Tustin, CA. “It doesn’t mean much.”

We asked our experts to weigh in to help clarify the distinction.

What is mortgage pre-qualification?

Pre-qualification means that a lender has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount.

But here’s the rub: Most often, the pre-qualification letter is an approximation—not a promise—based solely on the information you give the lender and its evaluation of your financial prospects.

“The analysis is based on the information that you have provided,” says David Reiss, a professor at the Brooklyn Law School and a real estate law expert. “It may not take into account your current credit report, and it does not look past the statements you have made about your income, assets, and liabilities.”

A pre-qualification is merely a financial snapshot that gives you an idea of the mortgage you might qualify for.

“It can be helpful if you are completely unaware what your current financial position will support regarding a mortgage amount,” says Kyle Winkfield, managing partner of O’Dell, Winkfield, Roseman, and Shipp, in Washington, DC. “It certainly helps if you are just beginning the process of looking to buy a house.”

Why is mortgage pre-approval better?

A pre-approval letter is the real deal, a statement from a lender that you qualify for a specific mortgage amount based on an underwriter’s review of all of your financial information: credit report, pay stubs, bank statement, salary, assets, and obligations.

Pre-approval should mean your loan is contingent only on the appraisal of the home you choose, providing that nothing changes in your financial picture before closing.

“This makes you as close to a cash buyer as you can be and gives you a huge advantage in a competitive market,” says Lea Lea Brown, a vice president and mortgage banker with Atlanta-based PrivatePlus Mortgage.

In fact, pre-approval letters paired with clean contracts without tons of contingencies have won bidding wars against all-cash offers, Brown says.

“The reliability and simplicity of your offer stand out over other offers,” Brown says. “And pre-approval can give you that reliability edge.”

So take notice, potential home buyers. While pre-qualification can be helpful in determining how much a lender is willing to give you, a pre-approval letter will make a stronger impression on sellers and let them know you have the cash to back up an offer.


5 Ways to Score a Lower Mortgage Payment

score a lower mortgage payment

By: Cathie Ericson

Has your mortgage left you so short on cash, you plan to eat Kraft mac ‘n’ cheese every night for the next 30 years? We feel your pain. That’s why most lenders scrutinize your financials and will only loan you as much as you can afford. But here’s the problem: Circumstances change. Layoffs happen, roofs need repairs, cars get into accidents, people get sick, and an endless number of other unforeseen setbacks can take a bite out of your budget. So if you’re scraping by every month, you may want to consider these totally legit tactics to score a lower mortgage payment so you don’t have to suffer.


This one’s a no-brainer.  Haven’t you heard? Interest rates are at an all-time low, and lower interest means lower monthly mortgage payments! Let’s say you took out a 30-year fixed-rate mortgage for $250,000  in January 2014 at 4.43% (the going rate at the time, according to Freddie Mac).

If you refinanced today at 3.5%, you would save approximately $48,141 over the term of the loan (assuming closing costs of approximately $3,000). Or, to really make you run out and refinance, let’s call it about $125 extra in your pocket per month right this minute. It’s like getting a raise without even having to work harder.

If you switch to a 20-year mortgage, on the other hand, your monthly payment would more or less stay the same, but you’d be paying for 10 fewer years, saving you almost $120,000 in interest over the life of the loan. That’s a nice chunk of change!

Ditch your mortgage insurance

If your down payment totaled less than 20% of your home’s value, most lenders will require that you pay mortgage insurance. That will cost you around $225 a month on a $250,000 house if you only put down 5%. To eliminate this extra burden, you can always try scrounging together enough money to reach that 20% threshold, but there’s another (far easier) way as well: If your property has appreciated 20% and it’s been two or more years since you bought it, you can have the mortgage insurance removed without having to refinance. “In our current economy, it’s probable that within two years, you should be in position to have 20% equity,” says Frank Fuentes, vice president of multicultural lending for New American Funding.

Combine the two above for max savings

The recent home value increases, combined with today’s lower interest rates, can give borrowers a double whammy in terms of savings, says Joe Tishkoff of Skyline Home Loans.

For example, if a home was purchased for $350,000 with 5% down, the borrower would have gotten a mortgage for $332,500.

A year and a half ago, interest rates were approximately 1% higher than they are now… plus, let’s say the home has appreciated in value and is now worth $385,000. A borrower would save approximately $350 to $375 a month by refinancing at today’s rates and by reducing or eliminating mortgage insurance commensurate with the home’s higher value. “That amounts to an 18% payment reduction, which buyers haven’t seen in the last decade,” Tishkoff points out.

Look for an interest-only loan

With this type of loan, the borrower has the flexibility to only pay interest for the first 10 years of the 30-year loan, which makes the monthly payment substantially lower than if you were paying principal and interest. These loans are ideal for borrowers whose income may be sporadic, since they can make lower payments each month, yet make additional payments in months when they have better cash flow, says Daniel Vaturi, a mortgage loan originator with FM Home Loans.

For example, with a 3.5% rate on a $250,000 loan, a standard 30-year fixed rate loan with principal and interest would come to $1,122.61 per month But with an interest-only loan, the mandatory payment would fall to $729.17 monthly for the first 10 years. Of course, after that period, you will have to make higher payments—how much is something you will negotiate—but if you anticipate that your job situation will stabilize and/or you will be making a better income by then, this tradeoff could very well be worth it.

Get an ARM vs fixed rate mortgage

While the vast majority of people select a 30-year fixed rate loan, in reality, few people hold a mortgage that long, says Bruce Ailion, Realtor and attorney for RE/Max Town and Country in Atlanta. A short-term adjustable rate mortgage (ARM), which is fixed for 3, 5, 7 or 10 years and then adjusts, will have a lower starting rate, so you will save money in the early years. “If you are planning to stay less than 10 years, there’s no reason to pay a premium to have a rate locked in for the time you will not have the loan,” Ailion points out. However, he cautions that choosing an ARM requires some projected clarity of your future plans, and a willingness to accept the consequences if you guessed wrong. “Most people opt for certainty; they sleep better at night knowing their payment does not change,” says Ailion. “Still, they could likely save serious money with an ARM.”

Want to see how much your mortgage payments will change with these strategies? Plug your numbers into’s mortgage calculator to find out how much you’ll save.


5 Things to Consider When Shopping for a Refinance Deal (It’s Not as Scary as It Sounds!)

refinance mortgage

By: Cathie Ericson

Shopping for a mortgage can be about as much fun as going to the dentist. And after going through it once, the thought of doing it all over again with a mortgage refinance might feel more akin, in fact, to getting a root canal. A long, complicated root canal.

We know it’s not the kind of thing anybody wants to do. But refinancing can be lucrative; we’re talking major cash—right in your pocket. In fact, American homeowners are missing out on at least $13 billion a year by not refinancing their mortgages. And, just like when you did it the first time, it pays to shop around. Sure, your current lender might be the best bet. But if you don’t look at other options, you could be leaving money on the table.

Here are some things to consider when shopping for a mortgage refinance—and some tips to make it as painless as possible. (You’re on your own with the root canals, however.)

  1. Do you really need a mortgage refinance?

Of course this is the first question to answer. And it’s likely you do, since mortgage rates are currently hovering around all-time lows.

We’ve got a handy calculator that can show how much money you can save if you lower your rate by even as little as half a percentage point. Say, for example, you’ve got a $300,000 mortgage. With a 3.5% rate, you’d be paying roughly $1,450 each month. Lower that rate by a mere half percentage point, to 3.0%, and your payment dips to $1,387. Of course, you would gladly accept an extra $100 a month, plus you’d pay about $22,000 less in interest over the life of the loan.

  1. Should you stay with your current lender?

You already have a mortgage, and it seems so easy to just stick with that provider. And that can be a great option, says Bob Melone, loan officer at Radius Financial Group in Boston, provided you’re happy with their service.

“Often I find that people think about refinancing because they get a letter in the mail or hear a radio ad, and their ears perk up at the amazing rates that are quoted,” Melone says. “But what borrowers fail to realize is that getting those quoted rates might require something crazy like 50% equity in the home and a near-perfect credit score. By starting the conversation with your existing lender, you can sort through conflicting information with someone who is giving it to you straight.”

  1. Should you find someone new?

Maybe you feel that your current lender isn’t doing enough to woo you. And perhaps there’s someone else out there who could give you what you want—which is, in most cases, a lower rate.

This is especially true if you’re currently working with a big bank.

“A consumer would be smart to consider a direct lender who services their own loans,” says Luis Hernandez, branch manager and loan originator for New American Funding in Chicago.

That means that whoever is processing your refinance is also going to work with you through the life of your loan. In addition, he adds, direct lenders might be able to offer a zero-closing cost refinance, since they’re interested in developing long-term relationships with clients.

Worried about the deluge of paperwork that a new lender might require? The stack of paperwork is likely to be similar even if you stay with your existing lender.

  1. How do you find the right lender for a refinance?

With so many lender options available, how do you know where to begin? Melone recommends talking to a local real estate agent whom you trust.

“They not only know whose rates may be the most competitive, but also who the better mortgage loan officers are—those who will take the time to talk you through the details of the loan you are considering,” he says.

And although we’re advising you to shop around, beware of casting too wide a net. Limit your search to two to three lenders to avoid becoming overwhelmed.

“If you get a good feeling from them, I would stop there, because they are giving you enough of an overview of what’s out there without completely confusing you,” he says.

  1. What should you look for in a mortgage refinance?

“Most lenders will provide you with a detailed report so you can see what the fees are and can compare apples to apples,” Hernandez says. Here’s what you should pay attention to:

  • Rates:Since rates fluctuate daily, you should ideally make your queries to various lenders on the same day.
  • Closing costs: Compare the fees with what you’ll save, to make sure you’re at least breaking even. For example, if closing costs are $3,000, and you’re saving $100 a month, it will take 30 months to break even.
  • Closing time: You want to make sure that your rate is “locked” (meaning that it can’t go up) for a sufficient amount of time between application and closing—probably around 45 days. “Your rate lock is even more important on a refinance than a purchase,” Melone notes. When you purchase a home, you’re liable to buy it even if rates tick up, but with a refinance, a higher rate could mean that it no longer makes sense.
  • APR: Everyone talks about interest rates, but fewer people talk about APR, or annual percentage rate. But this can be a more accurate way to compare the total cost of loans. APR combines the interest rate with the closing costs to create the total cost of a loan, expressed as a percentage. While not every closing cost is captured in this number—the credit report, appraisal, title insurance and inspection fees might be extra—it will include such biggies as origination fees and mortgage insurance.
  • Terms: Make sure the lender outlines the terms and what will happen if it sells your loan. “Terms are unlikely to change even if they sell it, but it’s wise to ask,” Melone says.

Like what you see? Ask for a “loan estimate,” the official document that binds a lender to the terms for 10 days.

And with that, your shopping is done. All that’s left is to decide is how you’ll spend that “raise” you’ve earned.


Is There Really Any Difference Between Mortgage Lenders?

pick a mortgage door


Is There Really Any Difference Between Mortgage Lenders? – Real Estate News and Advice –

The Consumer Financial Protection Bureau has safeguards in place to make sure mortgage companies operate on a level playing field with consumers. The level playing field specifically has to do with rates, pricing, and whether borrowers are getting a fair and reasonable offer from one lender to another. But how banks look at your financial picture is something else entirely.

Here are some factors that impact how your mortgage company works and the deal you get on your mortgage.

What’s their relationship with Fannie Mae & Freddie Mac?

The relationship your mortgage company has with Fannie Mae and Freddie Mac carries significance in whether or not they can fund your loan even if it is slightly outside the box.

For example, if you’re dealing with a company that originates the loan through another source, and then ultimately that loan is sold on the secondary market, the mortgage originator may be more conservative in its product offering and underwriting. Simply put, the more hands touching the file, the more scrutiny that file is going to have when the loan ultimately is delivered to the end investor.

Are there investor overlays?

Some mortgage companies still have what are called investor overlays, which are additional constraints an individual mortgage company may have beyond what Fannie Mae and Freddie Mac deem acceptable as traditional underwriting standards. For example, some mortgage companies will not let you pay off debt to qualify while others do.

What products do they offer?

Not all lenders carry the same types of loans, and some have differing restrictions for some loan types. For example, the debt-to-income ratio can differ among lenders. If you have a DTI on a jumbo mortgage (a special kind of mortgage based on the amount of the loan) beyond 43%, some companies won’t work with you, while others will go as high as 49%. Another example could be an FHA loan with a credit score, say, at 600 versus one at 640. Some work with a 600 score, some do not. (You can check your credit scores for free on to see where you stand.)

Is There Really Any Difference Between Mortgage Lenders? – Real Estate News and Advice –

Where you get your mortgage is entirely up to you as a smart, well-informed consumer. Do not be fooled by a lender or mortgage company promising you the world just to get your business, only to find later on your loan has too many roadblocks or your financial picture does not meet the guidelines set forth by that company. Integrity in lending and helping consumers is quality you should look for when picking a reputable mortgage source.


Can Consolidating Your Mortgages Save You Money?

mortgage consolidation


Combining your first and second mortgages into one can save you money if you do it right. Here are some smart, money-saving tips to be aware of when you submit a loan application to refinance and consolidate your mortgages.

When you apply to refinance your home with the intent of financing more money beyond the balance of your first mortgage, your total loan amount could fall into being categorized by your lender as a cash-out refinance, even if you are not pulling funds at the closing table.

The reason consumers should pay attention to this is because when you do a cash-out refinance, the loan costs more.

There are two types of refinances: rate and term refis and cash-out refis. If your goals for refinancing include shortening your repayment term and/or reducing your mortgage payment, then your loan is generally considered to be a “rate and term” refinance. However, if you are cashing out any equity (including a second mortgage you obtained after you bought the home), paying off debt, or pulling funds out for any other purpose, your loan will viewed as a “cash-out” refinance.

Cash-out refinances cost .375% more in loan pricing, which can affect fees and terms and have tighter equity requirements. For a cash-out loan of $400,000, for example, a .375% adjustment to the pricing would mean your $400,000 loan would cost more. Specifically, $1,500 more based on the loan amount ($400K X .00375) than if your purpose was rate and term.

(Mortgage pro tip: You can always change the structure of your loan during the loan process, meaning you can go from a rate and term loan to a cash-out option or vice versa.)

Here are four ways to get a cheaper refinance.

1. You had more than one mortgage when you originally financed

If you bought your home with both a first and second mortgage—for example, with an 80/10/10 loan where you put down 10%, got an 80% first and 10% second mortgage—as long as the first and second mortgage were used to specifically acquire the home and you are now looking to refinance the first and second mortgage into one, that loan will always be considered a rate and term loan as long as your intention is to not extract additional monies out beyond the debt owed.

(Mortgage pro tip: Financing closing costs do not make your loan cash out. You can finance the fees, and the loan will still be rate and term.)

2. You want to use an FHA loan

The Federal Housing Administration will allow you to combine a first and second loan into one as a rate and term refinance and will finance up to 97% loan to value on big loan amounts. In Sonoma County, CA, for example, the max FHA loan limit is $554,300. Depending on your financial circumstances, this could be a savvy approach to take, especially if your equity is limited.

3. Your combined loans are greater than $417K

In most U.S. counties, $417,000 is the conforming loan limit. If your first and second mortgage total is bigger than $417,000, and is considered to be a cash-out refinance because the second mortgage was used for some purpose other than buying the home, you will generally need at least 30% equity in your home (in some cases more depending on your credit score and property type). You can check your credit scores for free on to see where you stand.

However, there are some jumbo investors in the market that will do a rate and term refinance all the way down to a loan size at $417,000 or bigger. This can minimize the impact a cash-out refinance could create depending on your equity position and financial profile. Be sure to check with your mortgage company for specific jumbo investor guidelines.

4. You haven’t taken money out on the second mortgage recently

Many lenders will combine a first and second mortgage into one as a rate and term refinance even if the second mortgage was taken out after the original loan was made (for home improvements, etc.) as long as the second mortgage has no draws in the past 12 months. If you fit that requirement, the needed equity position drops to 20%. The devil is in the details. No draws in the past 12 months on your second mortgage could make all the financial difference for you.

Not sure if your loan will be considered? Talk with a mortgage company. You might find a lender, a bank, and a credit union to be far different from one another in terms of what can or cannot be done. If you’re looking to save money, you owe it to yourself to check on this continually, especially if you’ve been turned down in the past. Check every few months. You might just find you actually can get your loan done after all.