Are you really preapproved or just prequalifed for a mortgage? Part 1
Rhonda Porter on 10 6, 2007
There’s quite a difference between being prequalifed for a mortgage and preapproved. The letters that Loan Originators provide when requested for a prequal or preapproval may appear very similar. In fact, I’ve talked to borrowers on the phone who thought they were actually preapproved, when all they really had was a Good Faith Estimate from a lender. A Good Faith Estimate is just a rate and fee quote–an estimate is not a commitment to lend and does not indicate that someone has been prequalified.
Getting prequalifed is the stage just before becoming preapproved with a lender. It’s a good start. This is a great way to learn about a Loan Originator and to help you determine which Mortgage Professional you’re going to select to assist you with financing one of your largest investments. There’s no strings attached yet to the lender, you’re investing a little of your time and perhaps a few bones for a credit report.
The prequalification process help you determine:
- What your mortgage payment will be
- Available mortgage programs
- How much home you can afford
- How much money you will need for the down payment and closing costs
- Your opinion of the Loan Originator (what is their skill level, knowledge, experience, available programs, etc.)
Once a prequalification is complete, you or your Real Estate Agent can request a Prequalification Letter that may be used for presenting an offer on a home. A preapproval letter is stronger, however, a prequal can help buy you some time until a true preapproval is possible.
When a buyer is prequalifed, this should mean at the very least, the LO has obtained their income, assets (down payment and additional savings) and credit information. This can just be verbal—over the phone. The information that you have provided is not necessarily verified (if you have not provided your W2s, paystubs, asset accounts to your LO, you’re definitely not preapproved). If your information has not been ran through underwriting, you are not preapproved. It’s possible that you have provided your supporting documentation and that the LO has submitted your information to underwriting and you may still not be preapproved, or you may be “preapproved with conditions”.
Sometimes home buyers need a little elbow grease or significant documents are still required and you don’t want to disclose it on a preapproval letter. In this case, a prequal letter may better serve the client to buy them some time (if the listing agent will accept a prequal letter).
At the minimum, a prequal letter from a Loan Originator is simply confirming that an interview has taken place between a potential buyer and the LO. When I write a prequal letter, it will state something along the lines of:
“Dear Agent, This letter is to certify that based upon preliminary information, Ima Buyer has been prequalifed for conventional financing from Mortgage Master Service Corporation to purchase a home with a sales price of $375,000. A full approval is expected after receipt of the Purchase and Sale Agreement and other documentation.
This prequalification is based upon final verification of information supplied by borrower. A satisfactory property appraisal & clear title must also be furnished to the lender prior to closing this loan.”
A prequal letter may also state (if these items have actually been provided and if it’s true): “Ima Buyer has excellent credit” meaning her credit has been pulled and her scores are over 680.
What is stated in the prequal letter truly depends on how much information the buyer has provided and whether or not the information has been submitted to an underwriter for approval. I will write a weak or strong letter depending on how much information I have to support it.
I prefer to provide preapproval letters, as I’m sure the buyer and agent do too. If you’re competing on a home for sale against someone who is preapproved and you’re only prequalifed, you are in a weaker position.
About the Author: Rhonda Porter
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8 Responses to “Are you really preapproved or just prequalifed for a mortgage? Part 1”
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Rhonda,
Thank you! Well written for the consumer.
How many pre quals vs. pre approvals are you issuing? I don’t go shopping with a buyer until I have the pre-approval in hand.
Thanks Greg. I tend to do more preapprovals than prequals. Usually borrowers have been pretty serious about wanting to present an offer. I do have one FHA “prequal” currently.
[...] Are you really preapproved or are you just prequalifed for a mortgage? Part 2 October 14, 2007 A preapproval is the next step after becoming prequalifed. Essentially, this means that you are supplying all of the documentation that is required to support your loan scenario. Everything you have told the Loan Originator needs to be backed up for a “full doc” loan. The LO will review your documentation (W2s, paystubs, asset accounts, credit report—tax returns if you’re self employed or paid commission…etc.) and make sure that they have a strong file for the underwriter. Once you have selected your mortgage program, your information is typically submitted to an AUS (automated underwriting system aka a computer) which produces “findings”. The findings detail what type of documentation is required for the loan commitment. Sometimes the findings will require less or more documentation than a LO has obtained. Unless the transaction is 20% down with 680 credit scores, these days, I’m having our “live human underwriters” validate the findings (this means they’re comparing what the computer has spit out to what documentation the borrower has provided me). [...]
[...] Are you really preapproved or just prequalifed for a mortgage? Part 1 There’s quite a difference between being prequalifed for a mortgage and preapproved. The letters that Loan Originators provide when requested for a prequal or preapproval may appear very similar. In fact, I’ve talked to borrowers on the phone who thought they were actually preapproved, when all t… [...]
I think it is wrong for originators to issue “preapprovals” without having ones file fully underwritten. Not taking the steps required can have devastating effects on clients who are so exited to buy only to find out later that they truly do not qualify.
J.H
Voyage Home Loans
I agree and that’s my point with the posts I wrote (series of 2) about prequal vs preapproval. There are too many what ifs, ands or buts involved in the process now. We’re pretty lucky to have in-house underwriting and it may take a little longer to produce a preapproval letter, however it’s at least worth more than the paper it’s written on.
Borrowers need to know the difference for their own protection and piece of mind-thanks for all of your postings
Thanks, Craig. I’m amazed how many people I talk to who assume that becaue a good faith estimate is provided to them, they think they are preapproved (or even prequalified) or locked in for the loan.
Makes me think that HUD should have added a “block” to the new GFE stating:
( ) you are preapproved for this scenario
( ) you are prequalifed for this scenario
( ) this is just a quote of rate and fees available at this moment.