Pre-Qualification vs. Pre-Approval
These lending terms have been thrown around loosely (often interchanged), and have caused some confusion among home buyers and Realtors.
The term Pre-Qualification typically describes a conversation held between a potential borrower and a mortgage loan originator. This conversation might include a discussion of credit, income and possible assets of the applicant.
Under this scenario, the information is probably not being verified with documentation or research of any kind. During this initial stage, an idea or “ballpark figure” of what the potential applicant might qualify for could be discussed.
Serious buyers know that in order to have their offers considered, they’ll need to be submitted with a real Pre-Approval Letter. Most loan originators (myself included) will not issue a Pre-Approval Letter without examining the borrower’s credit report, income documentation, and any liquid assets available.
The Pre-Approval goes one step further. The loan originator will calculate (based upon documentation supplied by the borrower) the maximum loan amount for which the borrower would qualify.
You can see a sample letter here.
The Pre-Approval Letter is then written to illustrate the borrowing power of the potential buyer. This is extremely helpful when submitting offers, as it gives the seller confidence that the buyer’s deal will not fall through (due to financing).
I have personally been a part of deals that were accepted because my borrower’s offer included a Pre-Approval Letter.
It should be noted that neither a Pre-Qualification nor a Pre-Approval Letter is a commitment from a lender. The loan (and its approval) would still be subject to underwriting, verifications, and the appraisal of the subject property.
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