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How is a mortgage pre-approval different than pre-qualification?

What you need to know prior to getting preapproved for a mortgage home loan!

Before you approach a lender to get pre-approved for a mortgage loan, it is imperative to understand the difference between "pre-approval" and "pre-qualification". The three basic stages of the mortgage application process are pre-qualification, pre-approval, and mortgage commitment.

Here, we explain the the difference is between a mortgage pre-qualification, a mortgage pre-approval and a final approval. Let's get right into it.

Mortgage Prequalification VS Mortgage Preapproval

As you browse the internet for information regarding buying your new home you will encounter many articles regarding pre-qualifying AND getting pre-approved for a mortgage. Often times, you may hear the term "prequalified for a mortgage" or "preapproved for a mortgage". This begs the question: what is the difference between prequalified and preapproved and which should you choose?

A mortgage pre-qualification is an informal review of your financial profile. Typically a pre-qualification will be issued after you disclose your information via the phone, over the internet or interviewed by a mortgage loan professional about your income and expenses. The pre-qualification is not based on the actual review of information. The lender or mortgage banker is basically "taking your word for it" and issuing a pre-qualification letter based on the data you provided. That said, the pre-qualification is only as good as the information you provided. If you thought your credit score was 720 but is actually 685 this will have a dramatic impact on your pre-qualification.

A pre-qualification can be valuable in the very early stages of the home ownership process. If you just want to know if buying a home is in the realm of possibilities a pre-qualification could be valuable for you. It gives you a general idea of the price range you can afford to buy a house. It really doesn't guarantee securing a mortgage home loan.

Once you determine that buying a home is possible and you are ready to actually start shopping for homes you need to move from the mortgage pre-qualification stage to the mortgage pre-approval stage. This simply means it is time to gather all the documents that prove the information you provided for the pre-qualification. It means that a lender has closely reviewed your credit report, your documented income, your employment history and has determined which mortgage loan program would best fit your situation and the maximum loan amount you can borrow and qualify for.

For example, if you told the bank that you make $12,000 a month and your FICO score is 680 to obtain your pre-qualification it is time to send in your bank statements, signed credit authorization, most recent paystubs, w-2s and last two years' tax returns so the bank can verify your income and your credit history as part of your pre-approval.

A proper pre-approval will allow you to simply find a home and not have to worry about whether or not your loan will go through. Your loan is approved and all the bank needs is an address so they can do an appraisal and close your loan.

Mortgage Approval Comparison

In a nutshell, the difference between a "Mortgage pre-qualification", "Mortgage pre-approval" and a "Final approval" is as follows:

  • Mortgage pre-qualification: is basically a determination whether or not prospective applicant will most likely prequalify for a mortgage home loan. Through this process, applicants provide lenders with basic financial information such as income, debts and credit score without having to complete a mortgage loan application. Lenders can then determine how much the amount of loan a prospective applicant can qualify for based on investor's lending programs and guidelines.

  • Mortgage pre-approval: is a lender's formal review and in-debt verification of supplied income documentation i.e. W2's, bank statements and/or tax returns as well as employment and credit background. Lender usually request a credit authorized and a completed pre-application worksheet to get your mortgage process started and issue a conditional loan commitment. This process is recommended before shopping for a home.

  • Final Approval: This is the final commitment by the lending institution. It takes usually done right after an offer has been accepted by the seller. The lender will request your purchase agreement, order appraisal and title report and run the mortgage application through a comprehensive underwriting process to determine whether a final loan commitment can be issued.

# Pre-Qualifying for Mortgage Mortgage Pre-Approval Final Approval
1 First step to buying a home Second step to buying a home Third step to home buying
2 Find out if home buying is possible Find out if loan approval is possible Find out if loan closing is possible
3 Considered possible home buyer Considered strong home buyer Considered current home buyer
4 Not considered by sellers Can be used as a bargaining tool Can be stressful process
5 Informal review of income and credit Formal review of income and credit Comprehensive review of all loan documents, appraisal & title report
6 Employment & Income documentation not required Income is reviewed & verified Employment is reviewed and verified
7 Credit authorization not required Credit authorization is required Credit background is reviewed
8 Mortgage Application not required Pre-application/loan worksheet required Complete loan application is required and reviewed
9 Not guaranteed by lenders Conditional guarantee by lenders pending review of appraisal and title report Guaranteed commitment by lenders
10 Appraisal and title report not required Conditional approval pending appraisal and title review Appraisal and title report are reviewed
11 Accepted by some realtors Recommended and accepted by all realtor Realtors are blissfully and overly happy
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A Must Download

During the mortgage loan preapproval process, it is extremely important that Nothing Changes in your financial world. We recommend you download the following do's & dont's of getting a mortgage home loan!

Download The White Paper

We recommend you to download the mortgage preapproval process white paper by Ryan James O'Kane