By Mike Miles
In the mortgage industry, home buyers are at some point either pre-approved or pre-qualified or both. What’s the difference?
A pre-qualification is basically a stripped down version of a pre-approval. Pre-qualifications are completed once a buyer has entered some basic data into a short loan application, authorizes credit to be pulled and provides a snapshot of their income. A letter of pre-qualification is generated to identify that a buyer fits within guidelines. Pre-qualifications also help identify a target price and loan amount. Pre-qualification letters are good for people who are thinking about buying many months down the road. Once a buyer becomes actively viewing properties, it’s important that they then get pre-approved.
Pre-approvals can take more time. A true pre-approval is basically the equivalent of a lender conditionally committing to the specifications (price and loan amount) identified on the letter. A letter of pre-approval should be generated following the completion of a few steps that include, but are not limited to:
- A review of full tri-merged credit report (tri-merge includes Equifax, Experian and TransUnion)
- 30-days’ worth of current income identified, documented and calculated
- Two years of income tax and/or W2’s calculated
- Assets identified to support the down payment to be applied at closing
- An automated underwriting decision completed (this does not require a buyers participation at this level, but it’s a tool for loan officers to use to identify underwriting requirements based upon the buyers individual credit and income profile as identified to this point)
As you can see, the difference between a pre-approval and a pre-qualification is significant. Unfortunately there are too many lending companies that don’t go the extra mile to complete a pre-approval for buyers and their real estate agents. Instead, they tell everyone they were pre-approved when they may have only been pre-qualified. There are many moving parts and dozens of conditions that have to come together and satisfied during the underwriting process and a pre-approval identifies many of those when a pre-qualification doesn’t. That can end up biting buyers, agents and sellers in the backside if certain conditions can’t actually be satisfied.
This weekly Sponsored Column is written by Mike Miles of Fountain Mortgage. Located in Prairie Village, Fountain Mortgage is dedicated to educating, and thus empowering, clients to make the best financial decision possible for their situation. Contact Fountain today.
Mike Miles NMLS ID: 265927; Fountain Mortgage NMLS: 1138268