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.

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More of Your Mortgage Questions Answered

win the bidding war on the home you want

Thanks to all the respondents who submitted questions on Facebook and Twitter about the real estate market, credit scores, and mortgages for the Google Hangout on Tuesday with a panel of our experts. We weren’t able to address them all during the hangout, but panelist Michael Matthews, senior vice president of PrimeLending, answered your remaining questions on mortgages. The questions have been edited for style and clarity.

Q: Gen Y/first-time buyers seem to be finally wanting out of the basement and are beginning to look at homes; seeing lots of credit issues. Is it better for them to go FHA or conventional?

A: It depends on the person’s situation. If you call a loan officer at PrimeLending, they will run your credit and discuss the options that are available. Once discussed, they can advise you on the different types of loans that are available.

Q: What is a pre-approval and what do they look at?

A: The pre-approval is the letter that a lender can provide that shows the real estate agent that you are ready to purchase a home. Credit is pulled and income and asset information is verified and ratios are run to make sure you qualify for the house that you are interested in.

Q: What is the difference between going to my bank or to a mortgage broker? Will it save me money?

A: We recommend checking both; shopping around is in your best interest.

Q: How will the Aug. 1 CFPB changes affect my buying a home?

A: The changes happening in August will make the process easier for you. Disclosures that you receive from the lender are being simplified, which will make the process more clear.

Q: If the rate drops by the time I close, can I get the better rate?

A: That depends on your lender, but with PrimeLending, yes. They have a one-time float-down prior to closing, and there is no cost.

Q: What is the difference between an FHA and a conventional loan?

A: There are a number of differences. The FHA [Federal Housing Administration] is a government-backed loan that has a down payment of as little as 3.5%. Conventional loans also have low down-payments and most are 3% to 5% down. Your lender should discuss multiple options and run payment scenarios on both.

Q: What if the appraisal is too low?

A: When the house is appraised, the value must support the loan being offered. If it comes in low, you can renegotiate with the seller.

Q: Why should I lock in my rate?

A: Rates fluctuate daily. If you have the house selected and you are ready to begin the process, you should lock in your rate and get started.

Q: When you are applying for a jumbo mortgage, what are lenders looking for?

A: A jumbo loan is more risky, based on the amount being loaned. Like with all loans, the lender is looking at your job and the number of years at your employer and in your occupation overall. They want to know how much cash reserves you have, meaning if something unfortunate happened with your job, could you still afford to make your payments. Credit history, how well do you pay your bills, all of these items are used to make a credit decision.

Q: What “first-time buyer” programs are out there?

A: This depends on where you are buying. Most cities have programs for first-time home buyers. It’s important to find a real estate agent in your market that can be the expert for you.

Q: What’s the difference between a mortgage FICO score and other FICO scores?

A: FICO scores are used to determine your overall credit profile; there isn’t anything specific for a mortgage. When buying a car, the same FICO is being used, and you can obtain a free credit report through one of the large agencies: TransUnion, Equifax, or Experian.

Q: Is it better for first-time buyers to go FHA or conventional?

A: It depends on your loan amount, your credit, and how much you want to put down. For example, if you were going to put down 20%, you would leverage a conventional loan so that you wouldn’t be required to pay mortgage insurance. Both loans are exceptional and will be discussed when you speak with your lender.

Q: What credit scores get the best rates?

A: Each lender has different rates and will have higher rates when the credit profile is lower. Please take time to speak with a lender so they can ask questions and provide you with the information you requested.

Q: How does a job change with lower gross income affect buying a house?

A: Job change can affect buying a home if you change industries. If you make a change but are in the same line of work, you shouldn’t have a concern. Regarding lower income, if you are making less, it impacts how much you will qualify for. When you speak to your lender, they can run your income ratios and help understand your unique situation.

Q: When determining if you qualify for USDA, is your current gross income used or the income on your W-4?

A: It depends on the borrower’s type of income—for a salaried borrower there could be an average utilized, which could include both the borrower’s current gross YTD and the previous year’s W-2.

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