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 prequalification, pre-approval, and a conditional loan approval?
Each one represents a different degree or level of loan approval that can have a big impact on your offer being accepted, the amount of stress you experience during the home buying process, and how quickly your loan can close. Sadly, many banks have abandoned issuing pre-approvals.
Prequal or Prequalification = high risk/high stress for the borrower
This is the lowest level of approval which results in high numbers of people getting denied while in escrow. This is when a loan officer/originator asks you basic questions about your income and credit. It’s really just a quick assessment of your ability to qualify.
Lender who say they can ‘pre-approve’ you in 5 minutes are doing this. They purposly mislead you in hopes of getting you to actually apply with them.
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 give a broad indication how much you will qualify for.
Some lenders actually issue prequal letters to home buyers to submit with their offer to purchase. This prequal letter is based solely on the opinion of the loan officer who don’t actually approve loans.
If you are serious about buying a home, this is a waste of your time.
Pre-Approval = mid level risk/stress for borrower
A pre-approval requires more information from a borrower, therefore it carries more weight and credibility…..but still not the best you can do. Buyers with pre-approvals still have a high rate of loan denials while in escrow.
A credit report will have been run, loan application completed, all income verified via pay stubs/tax returns, and funds needed for down payment and closing costs will have been submitted & reviewed.
The application should also be run through an automated desktop underwriting approval engine, like Fannie Mae’s DU/DO or Freddie Mac’s Loan Prospector(LP) system, FHA’s Total Scorecard, or USDA’s GUS system.
The problem with an automated DU/LP approval is the information inputted is still the opinion of the loan officer….like what your qualifying income will be. It can also give a false approval if you have and disputed accounts on your credit report.
Conditional Approval/Loan Commitment Letter = low risk/low stress for borrower
I refer to this as the PreferredBuyer™ Advantage Loan Approval. This is the highest level of approval you can receive without having a fully executed purchase contract.
This level of approval comes directly from the decision maker – the underwriter, and contains prior to doc (PTD) and prior to funding conditions (PTF). It’s an actual Loan Commitment.
In a multiple bid situation, sellers often give preference to buyer who have 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.
A conditional loan approval will close much faster than a prequal or pre-approval because many of the steps in the approval process have been completed…..often taking only 12-20 days to close escrow, assuming the appraisal doesn’t cause delays.
To find out how much you qualify for, fill out this easy 3 step Pre-qualification form.