Pre-Qualified, Pre-Approved & Approved

Borrowers often confuse and misuse the terms Pre-Qualified, Pre-Approved, and Approved.  Even realtors use the terms interchangeably and incorrectly. While they sound like basically the same thing, there are some substantive differences among the three and it behooves borrowers to understand the subtle, yet crucial distinctions among them.

Because, incorrectly applied it could cost buyers their prospective dream home.

The first distinction that buyers are likely to come in contact with is the difference between pre-qualification and pre-approval.  A great many real estate agents do not want to waste their time with borrowers who are not pre-qualified; they do not want to show them houses that the buyers can’t afford.  Many agents insist on their clients being pre-approved before making an offer because in a multiple offer situation, all things being equal, the seller is much more apt to go with the buyer that’s been pre-approved as compared to pre-qualifed.  Here’s why.

PRE-QUALIFICATION

Pre-qualification simply means that the borrower has spoken with a loan officer and that his (or her) credit has been pulled and a cursory discussion of the borrower’s credit, assets, employment and residential history has taken place.   It is used when making an offer on a property because it indicates to the seller that the holder is qualified to purchase the house in question. In many cases, a loan program has not even been decided upon at this stage.  But, for a prospective buyer, it gives one an approximate price range in which to shop.  Because loan officers do not approve loans, a pre-qualification letter is not a commitment to lend. It is the weakest of consents because the application has not gone before an underwriter.

PRE-APPROVED

Pre-approved is a considerable step up from pre-qualification.  It means that the borrower’s loan information has been reviewed either by a lender’s underwriter (a person) or by a proprietary software underwriting program like Fannie Mae’s DU (for Desktop Underwriting) or Freddie Mac’s LP (for Loan Prospector) which lenders deem equally valid.  In either case the underwriter or the underwriting software has all the necessary information regarding employment history, income, assets, debts, and credit information as provided by the borrower(s) to grant a conditional approval.

For buyers, the pre-approval letter identifies the loan program, provides a tangible mortgage amount with a down-payment percentage, mortgage insurance, property taxes, and interest rates factored into the total.  This often results in an accurate payment and total costs to close.  The loan is still subject to a satisfactory appraisal, title report, and any additional conditions stipulated by the underwriter in accordance with the lender’s guidelines.  Thus, because it’s a more in-depth process a pre-approval is stronger than a pre-qualification and the seller is apt to favor the buyer who has been pre-approved because there is a much better chance of the escrow closing with the former.  Finally, getting a pre-approval allows buyers to close quickly when they find a property.

APPROVED

This is the real deal.  It’s the last step in the process.  After the property has been appraised, the buyer’s documentation satisfactorily verified and the other elements such as Title and Escrow have come together, the loan is finally APPROVED. Essentially, this is when the lender says, “Everything looks fine—let’s go to docs (signing).  This is, more or less, when it’s time to celebrate—a term with which everyone’s familiar.

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