If you are in the market for a new home and you make the wise choice of working with a Real Estate agent, one of the first things they will ask you Is, "Will you be paying cash or financing?" If the answer is, "financing," then the next question will be, "Are you pre-approved?"
The pre-approval/pre-qualification process is designed to let everyone in the transaction (Real Estate Agents, sellers, etc.) know that you have had a lender review your situation and you are approved to purchase a particular house. Thus, with a pre-approval letter in hand you are a much stronger buyer than someone who is not pre-approved.
So we hear the terms "pre-approval" and "pre-qualification" get used interchangeably in our industry and are often perceived as the same. The difference between a pre-qualification letter and a pre-approval letter is depicted in the following scenarios:
- Jane is looking to purchase a new home. She calls a lender to get pre-qualified, speaks to a loan originator for a few minutes, and obtains her pre-qualification letter within 20 minutes of picking up the phone. She was not asked to submit any income or asset documentation, but was told she could qualify for a home with a purchase price up to a $250,000. She spends 6 weeks looking for her new home and finds the perfect house with a listing price of $249,900. Her offer is accepted and Jane is now required to submit documents to verify her income and finances. A few weeks later Jane gets a call from the lender stating that her documentation has been reviewed and the underwriter denied the loan because Jane just recently started receiving overtime pay, and a two year history of receiving overtime pay is required to use it for qualification purposes. Thus, Jane was not approved for the $250,000 purchase price and the deal was denied.
- Liz is also looking to purchase a new home. She filled out an online application with VanDyk Mortgage and spoke with a Home Loan Advisor who told her that everything in her application was looking great. But before we can issue you a pre-approval letter we need to collect all your income documentation to verify all of our figures. Liz was able to quickly gather the documentation, submit them, and obtain her pre-approval letter for up to $250,000. She found the perfect new home a week later and had her offer accepted. Since VanDyk already had the majority of her documentation, the lending process was smooth, the loan closed fast, and there were no surprises along the way. Liz was able to move into her new home within 30 days of putting in her offer and she was very pleased.
So as you can see from the above scenarios, the difference between a pre-approval and pre-qualification is the verification of documentation. This process of verifying your income documentation upfront allows us to address issues at the beginning of the process and give our clients pre-approval letters they can count on.