The Difference between a Pre-Approval Letter and a Pre-Qualification Letter: What Buyer’s & Seller’s should know.

Home Buyers and Home Sellers should realize the Importance Of  Pre-Approval For Home Buyers and Home Sellers.

  • The number one reason why home loans get denied during the mortgage process is that the borrower was not properly qualified
  • Loan Officers should realize the Importance Of Pre-Approval For Home Buyers as well as home sellers
  • Home Buyers depend on loan officers that once they are pre-approved, that they cannot just close on their loan but be able to close it on time

To this day, many loan officers do not realize the Importance Of Pre-Approval For Home Buyers and sellers and not thoroughly qualify a borrower before issuing pre-approval letters

Why Loan Officers Should Know The Importance Of Pre-Approval For Home Buyers & Sellers

A pre-approval letter is extremely important due to the fact that it is a great predictor that borrower will close on their residential mortgage loan

  • Whereas a pre-qualification is a mortgage loan originator’s prediction that the likelihood of getting mortgage approval is good and promising if everything checks out
  • Most real estate agents require that potential home buyers are armed with a pre-approval letter before they will show a property or let buyers make a written real estate purchase offer

What Is A Pre-Approval And How Do I Get A Pre-Approval Letter From A Mortgage Lender?

Pre-approvals are when lenders review the following when qualifying:

  • Assets
  • Debts
  • Credit report
  • Credit scores
  • Debt to income ratios
  • Qualified And Other income

Importance Of Pre-Approval For Home Buyers And the Mortgage Process

After reviewing the basics, the loan officer may require more documents for further review:

  • The mortgage loan officer may require to review the borrower’s tax returns
  • Business tax returns and 1099’s if they are self-employed or own their own business
  • This is to make sure that the income they are declaring after write-offs will qualify them
  • For borrowers with challenged credit scores or credit history or borderline debt to income ratios, the loan originator will most likely run the borrower’s application through AUS
  • Fannie Mae’s Automated Underwriting System is to make sure they get an approve/eligible per DU FINDINGS prior to proceeding with the file 
  • How pre-approvals are issued depends on each individual mortgage company
  • Many loan originators  issue pre-approval letters in a matter of less than an hour which is not highly recommended

Once a home buyer is armed with a pre-approval letter, he or she can go and make an offer to purchase a home.

What Is The Difference Between Pre-Approvals And Pre-Qualification?

Again, all lenders have their own policy on how they issue pre-qualifications and pre-approvals.

  • The number one reason for a last-minute mortgage loan denial and/or stress during the mortgage process is because a loan officer did not properly qualify the borrower
  • There is no reason for a loan denial or stress during the mortgage process if the borrower was properly qualified

Importance Of Pre-Approval For Home Buyers Versus Pre-Qualification

A pre-qualification is less formal than a pre-approval where the loan officer will just pre-qualify you whether you qualify for a mortgage loan.

The loan officer will ask borrowers the following:

  • Gross monthly income
  • Credit scores
  • Whether the borrower has a  prior bankruptcy and/or foreclosure
  • Monthly debt
  • Assets

Most realtors do not give any weight on pre-qualification letters:

  • Most real estate agents want pre-approval before buyers can view homes and enter into a real estate purchase contract

Importance Of Pre-Approval And Why Do I Need To Get Pre-Approved Instead Of Pre-Qualified?

A pre-approval will determine how much of a home you can buy and what mortgage amount buyers will qualify for.

  • A pre-approval will also determine how much down payment will need including closing costs
  • A pre-approval will also tell borrowers how much monthly mortgage payments will be
  • Almost all realtors will not show a home unless buyers have a valid pre-approval letter from a mortgage lender
  • Sellers will not entertain any offers that you might offer
  • A pre-approval will determine what the term and the rate of mortgage will be
  • For those who do not qualify for a pre-approval, the loan officer can help borrowers with credit
  • So they can qualify in the very near future