Are you really preapproved or are you just prequalifed for a mortgage? Part 2

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

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 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.

Should Loan Originators Retract Preapproval Letters?

Someone interested in buying a home interviews a couple of Loan Originators and selects one to become preapproved with. The Loan Originator meets with the buyers and takes a complete loan application, reviews their credit and obtains all of their documentation. The LO provides the buyers with all of the possible mortgage scenarios and they select which program is best suited for their financial goals. The LO then submits that loan scenario to their processor and/or underwriter for loan approval. (With our current market, I am submitting all supporting documentation to the underwriter to sign off on before issuing a preapproval. Before August, I would review the findings with the borrower’s supporting documentation and a majority of the time, I would issue the preapproval letter without underwriter review. I’m not taking any chances).

The Buyers are very excited and write an offer on a home with a real estate agent that the LO has not worked with before. The real estate agent uses the LO’s preapproval letter when submitting the offer to the Listing Agent and Sellers. The offer is accepted.

A few days later, the Buyer emails the Loan Originator and says, “Gee thanks…we’ve decided to go with the real estate agent’s preferred loan officer