Are you really preapproved or just prequalified for a mortgage? Part 1

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I Spy FisheyeThere’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 rate quote worksheet or possible a good faith estimate from a lender.  A good faith estimate, loan estiamte or rate quote worksheet are not a commitment to lend and do 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, manner, 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 and preferred by agents and sellers.  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 mortgage originator has obtained their income, assets (down payment and additional savings) and credit information.   This is often a verbal interview, 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 mortgage originator, 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 mortgage originator 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 placebetween a potential buyer and the mortgage originator.  When I prepare a prequal letter, it will state something along the lines of:

“Dear Agent, This letter is to certify that based upon preliminary information,  Betty Bellevue 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):   “Betty Bellevue has excellent credit” meaning her credit has been pulled and her scores are over 740.

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.  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.

Ready to read Part 2 of Are really preapproved or just prequalified?

NOTE: I originally published this article at Rain City Guide. You can read the original post with comments by clicking here.  This post has been updated to reflect changes in the mortgage industry.

If you would like to become prequalified or preapproved, or would like a rate quote for a home located anywhere in Washington, click here.

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