approved loanThis topic seems to be the most misunderstood topic compared to all other mortgage terms.  A big reason many people don’t understand the difference comes from the lack of education.  A borrower just assumes a pre-qualification is a solid review of your financial situation and thinks they have a mortgage secured and can start the search for that perfect home.

Sometimes real estate agents don’t fully understand the difference between a pre-approval and pre-qualification and this can be very concerning.  If they submit an offer for their buyer with the wrong letter, their offer may get rejected and lose out on the home. It’s very important that buyers understand if they have been pre-approved or pre-qualified.  There is a difference.


The Pre-Qualification Letter

A pre-qualification is an inquiry made by a potential borrower concerning how much financing they may qualify for using basic credit information and oral estimates of income.  No information is verified with documents, since a pre-qualification doesn’t require this.  A loan officer helps with guiding and giving advice, when someone is just looking to get pre-qualified.

An inquiry for a pre-qualification would be perfect for someone looking to buy a home a few months from now, but wants an idea of how much of a mortgage they should qualify for.  They may also get an idea what programs would best fit their situation.  It helps give a future home buyer a better understanding of what to expect when they get more serious about looking at homes.

Here is some information a lender would need to help with your pre-qualification:

  • How much is your annual income?
  • How much do you plan on using for a down payment?
  • What are your estimated credit scores?
  • What is your two-year employment history?

This list is relatively short, since it’s just a pre-qualification and a brief understanding of your situation. Not all, but some lenders will issue a pre-qualification letter, so your realtor has an idea what your purchasing power should be.


The Pre-Approval Letter

A pre-approval letter is a more in-depth look at a borrowers buying power, by giving a maximum mortgage amount they would be approved for.  Most information is verified by showing documentation, since a pre-approval requires proof of what is completed on an application.  Documentation of income and liquid assets will be necessary, in order to receive a pre-approval letter.

After completing a full application, here is the list of items a lender would need to help with your pre-approval:

  • Documentation showing your income.  Tax returns, W2 statements and recent paystubs.
  • Documentation showing your liquid assets. Checking, savings, IRA, 401k, etc.  Typically, lenders will only allow a liquid asset, which means an asset you can immediately draw funds from.  An automobile would not be considered a liquid asset.
  • Documentation of anything that may be unusual, like a divorce decree from a past divorce. This shows any accounts you may or may not be responsible for.  Also, child support documentation showing you pay or receive this support.

A pre-approval letter is what you really need, when thinking about submitting an offer into a home.  Having a pre-approval letter will show you are a serious buyer and will help you if you are competing against other offers.


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