Prior to starting your home search and qualifying for a home mortgage loan, it’s important you know the difference between a mortgage prequal, pre-approval and a conditional loan approval. Many people, even lenders and real estate agents, wrongly use the terms interchangeably.
What’s the difference between a prequal (prequalification), pre-approval, and a conditional loan approval? Each one represents a different degree or level of loan approval and can have a big impact on your offer being accepted and how quickly your loan can close.
- Prequal (or Prequalification) – This is when a loan officer/mortgage lender asks you questions about your income and credit. It’s often just a quick assessment of your ability to qualify. They may or may not run your credit report, may review some of your income documentation, like pay stubs, bank statements, W2′s or tax returns, and indication how much you will qualify for. Some lenders actually issue prequal letters to home buyers to submit with their offer to purchase. This is based solely on the opinion of the loan officer…and they do not approve loans. If serious about buying a home, this is a waste of your time.
- Pre-Approval – A pre-approval contains more information about a borrower, therefore it carries more weight and credibility…..but still not the best you can do. A credit report will have been run, loan application completed, all income and funds to close documentation will have been submitted & reviewed, and the application run through an automated desktop underwriting approval engine, like Fannie Mae’s DU/DO or Freddie Mac’s Loan Prospector(LP) system. The problem with an automated DU/LP approval is the information inputted is still the opinion of the loan officer….like qualifying income. It can also give a false approval if you have and disputed accounts on your credit report.
- Conditional Approval/Loan Commitment Letter – I refer to this as the Preferred Buyer Loan Approval. This is the highest level of approval you can receive without having a fully executed purchase contract, title report, appraisal, or satisfaction of additional conditions. This level of approval comes directly from the decision maker – the underwriter, and contains prior to doc and prior to funding conditions. It’s actually a Loan Commitment. In a multiple bid situation, sellers often give preference to a buyer who has this level of approval because of the added assurance the borrowers loan will close. They know a buyer is more committed to buying because this level of approval requires more documentation and time than a quick pre-qual or pre-approval. It often closes much faster than a prequal or pre-approval because many of the steps in the approval process have been completed…..often taking only 15-20 days to close if all other parties work together.
If you would like to find out if you would qualify and/or how much you qualify for, fill out this easy 3 step Pre-qualification form.