If a loan originator pre-approves you for a mortgage on your new home, you’ve also been pre-qualified. However, if you have only been pre-qualified, you still need to have the mortgage company approve your loan.
Through pre-qualification, the lending company reviews your income, debt, assets, credit history and monies available for closing costs and downpayment and determines the amount you are qualified to finance, said Mike Jones, a branch manager for the Tempe branch of Scottsdale-based V.I.P. Mortgage.
A pre-approval, however, requires you to complete a loan application with all necessary pre-qualification documents along with additional material that a processor or underwriter may request to determine that, if you are approved for the purchase of the property, you can reasonably be expected to repay the loan, added Kent Nielson, a fellow branch manager in Tempe for V.I.P. Mortgage.
So whats the diff?
For one, who is actually reviewing the mortgage file.
“A pre-qualification is something that a loan originator does all on his/her own by having as little as a phone call with a borrower and as much as compiling a full loan file with supporting documentation and automated loan approval,” said Jeremy Lovett, a mortgage loan originator for the Scottsdale office of KS StateBank, based in Manhattan, Kansas.
“The pre-approval takes it to the next step by eliminating the guesswork and actually having the file reviewed by the processing and underwriting teams,” he said. "The pre-approval is issues only after an underwriter has reviewed a complete credit package — which is a loan file minus property/appraisal information — and found the file to meet all of the applicable program guidelines.”
How much information is collected and scrutinized is also key.
“The pre-qual determines how much the borrower is qualified to finance based on documents provided by the borrower. With a pre-approval, the loan originator will request even more documents be collected by the borrower and analyzed by an underwriter before being approved for the loan program requested,” Jones said.
Time is also a factor
“The pre-qualification is the loan originator’s educated guess as to whether or not a borrower will get a loan approval based on the facts presented to them. This process can be done in as little as a few hours since it is accomplished by a single person," Lovett said.
In contrast, pre-approval can take time. “The full loan pre-approval process will typically take days — if not weeks — depending on how quickly all of the borrower’s loan documents are submitted and the current turn-times for processing and underwriting of a file,” he said.
The bottom line
“When buying a home, it is always important to get pre-qualified for financing so you can determine what price range to shop for when looking at homes,” Nielson said. “The pre-approval helps to ensure that all of a borrower’s documentation has been reviewed and signed off on so they don’t run into issues at the end of the transaction.”
Still, many borrowers don’t reach out to a lender until just before writing an offer to purchase. “In cases where the borrower is that far along in the process there simply isn’t time to work up a full pre-approval to be issued with the purchase offer,” Lovett said.
A trio of possible scenarios
Lovett described three pre-qualification vs. pre-approval scenarios:
1. Borrower 1 has an 800+ FICO score, a high salary, large down-payment and is not selling his/her current home in order to acquire a new one.
2. Borrower 2 has an 699 FICO, a good salary with a regular bonus, is being gifted money for the down-payment and is renting now.
3. Borrower 3 has a 625 FICO, is paid commission only, has no down-payment and is living with family.
Results, according to Lovett: the first two are candidates for pre-qualification, while the third borrower should select pre-approval, he said.