PreQualification vs PreApproval
When purchasing a home, you want to be absolutely sure that you can qualify for the mortgage to purchase the property. A great deal of effort, emotion, and time go into a home search. The last thing you want to do is find the home of your dreams only to be told you will not qualify for the loan to purchase that home.
There are varying levels of Pre-Qualification/Pre-Approval. Let's define them:
1. Basic Pre-Qualification - This is where the Loan Officer, verbally completed a loan application with the Borrower. They verbally received income, credit information and asset information. No credit was pulled, and the Loan Officer depended on the Client's verbal information to calculate Debt to Income Ratios and Cash Reserves. NO CREDIT was pulled. NO supporting documentation was reviewed (Bank Statements, Paystubs, W-2's, Tax Returns). This is the most unreliable form of Pre-Qualification.
2. Pre-Qualification with Credit Pull - This is where the Loan Officer, verbally completed a loan application with the Borrower. They verbally received income and asset information, and PULLED CREDIT. NO supporting documentation was reviewed (Bank Statements, Paystubs, W-2's, Tax Returns). While this is much more reliable than a basic Pre-Qualification, but without supporting documents, there can be problems that can kill the deal for the Borrower.
3. Pre-Qualification with Credit Pull and Supporting Documentation - This is where the Loan Officer completes the loan application, pulls credit, and gets supporting documentation. Basically, this is a complete application ready to send to Underwriting. The only item missing is the Property and Underwriter review. In my opinion, this is the most solid Pre-Qualification short of underwriting the file without a property.
4. Pre-Approval - This is where the Loan Officer has completed the loan application, pulled credit, received supporting documents, and an Underwriter has reviewed the file excluding the property. This is as solid as it gets. Due to capacity issues, very few Brokers, Lenders, and Banks will actually do this. Taking into account manpower, the actual loans with a property will always take priority over loans with a property To Be Determined.
So, Dan, How can I know if I am really Pre-approved?
Ask your lender the following information:
Did you my full Loan Application?
Did you pull my Credit?
Did you review my supporting Income and Asset Documentation to review?
Have you run the my information in an Automated Underwriting System (AUS)?
How sure are you of your pre-approval?
If they did the above things, your lender did a thorough job of getting you pre-approved and you can go purchase a home being confident that you are pre-approved for a home loan.
