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What's the Difference Between a Pre-Qualification, Pre-Approval and Approval?

By Arvin Sahakian · Jan 8, 2015 · Mortgage

What's the Difference Between a Pre-Qualification, Pre-Approval and Approval?

Image courtesy of Flickr, Jason Ruedy

Understand the difference between getting pre-qualified, pre-approved, approved and what it means to you.

Each year approximately one trillion dollars' worth of mortgage loans lent out to millions of homeowners. Every single one of these borrowers had to go through the same process of getting pre-qualified, pre-approved and finally approved.

But what's the difference between the three stages and what does it mean to you? In this post we'll answer this question by describing in detail exactly what occurs and what to expect at each stage.

Pre-Qualification

Definition

You talk to a lender and they will tell you if you are "qualified," and if so, how much you may qualify for and what the rate a terms of the loans may be. You will state your personal information, such as your estimated credit, income and assets. Nothing is verified, no credit check is performed and no documents are sent to the lender.

A pre-qualification is the first step in the mortgage process with your lender or broker. This process can be done in person, over the phone, fax or over the internet. A loan application is not required and there should be no costs to you either.

Why is a Pre-Qualification Important?

A pre-qualification costs you nothing other than the time of researching rates online, or speaking with a loan officer. Additionally, it will give you a general idea of what's available and whether it's worthwhile to attempt to get approved for loan.

While a pre-qualification is no more than a conversation, be sure to provide your loan officer as much information as possible so you have the best idea whether or not trying to get a loan is worth your time. Be sure to disclose the following information:

  • Income for all borrowers (rental, alimony and child support income apply)
  • Realistic value of your property (if a refinance)
  • List of all credit card, student loan, car and other financial obligations (basic expenses such as groceries, cell phone bills and health insurance do not apply)
  • Whether you have any accounts delinquent, in collections or owe back taxes
  • Realistic opinion on what your credit score and report may look like
  • If you have had any bankruptcies, foreclosures or short sales in the past 10 years

With this information your lender or broker should be able to tell you whether there are possible loan options for you, and if so, what those terms may look like.

Pre-Approval

Definition

Beyond simply stating your personal information to the lender, you'll be required to complete a loan application and authorize a credit report be run. Additionally, you'll likely be required to submit additional documentation which may include the following:

  • Last 2 years if income tax returns (if self-employed or have income other that regular wages)
  • Most recent W-2 Statement (if wage earner)
  • 3-6 months of bank statements
  • Most recent paycheck stubs
  • Homeowners insurance declarations page (if doing a refinance)
  • Recent mortgage statement (if doing a refinance)
  • Documentation on any assets or investments you own (if necessary)

Depending on the lender and loan type, there may be other types of documentation requested before they are able to provide you with a pre-approval. A loan officer performs this step, not an underwriter. Take note that this is not a commitment to lend.

A pre-approval is the second step in the mortgage process and can be done in person, over the phone, fax or over the internet. Most lenders should not charge you out of pocket for a credit check at this point as it is customary to hold off on this charge until the closing of your loan.

Why is a Pre-Approval Important?

A pre-approval means that your lender has accepted to take your loan and you have met nearly all of the requirements. If you choose to take the next step with the lender you'll have to sign an Intent to Proceed and pay for an appraisal upfront.

For homebuyers, now you can now request a "Pre-Approval Letter" which outlines the lenders conditional commitment based on the documents you have provided. You will want to include this letter in any future purchase offers. This will differentiate you from other purchase offers that do not have a pre-approval letter and may improve your chances of the seller choosing you.

Additionally, during this step your lender will be able to "lock-in" your qualified rate and program. By locking in, they simply mean choosing a rate and program that will not change over the next 30 days even if rates change in the market.

Approval

Definition

In order to get approved you will have submitted your personal information, your credit report will have been run, and you will have submitted all supporting documentation to the lender. An underwriter will review your loan package and issue a formal decision. Your loan can either be approved, suspended or denied.

An approval is the third step in the mortgage process and can be done in person, over the phone, fax or over the internet. The underwriter has closely reviewed and verified all documents involved and determined that you have met all of the requirements necessary to proceed to the "funding" process. The funding process is when the lender takes the necessary final steps prior to releasing money.

If your file gets "Suspended":

This means the lender will need to receive and verify additional documentation before resuming the approval process. There are various reasons this may occur, such as copies of documents not being legible, pages and signatures are missing or certain documents are not up to date.

If your file gets "Denied":

This means the lender cannot fund your loan and the process stops. This can be for several reasons, such as the appraisal value is much lower than expected, your credit report and scores substantially change for the worst, or certain documents are submitted after required deadlines or not submitted at all.

When this occurs you will need to search for and re-submit your loan package to a new lender.

Why is an Approval Important?

An approval means your loan will proceed to the "funding" process. The majority of the work has been completed and there are just a few more administrative tasks required before the lender releases the money.

During this time your credit may be verified a second time to make sure no there are no negative changes from when the process started. Additionally, you may be asked to verify your income again and provide a current set of bank statements. It's especially important that communication is clear and any required documents are sent in immediately.

Summary

By understanding the mortgage process you will know what stage you are at and how much further you have to go. There are three major steps before your loan is ready to be funded by the lender and the release of money is authorized:

  1. A pre-qualification will tell you whether there are any loans available to you and whether it's worthwhile to attempt to get approved.
  2. A pre-approval means that the lender has accepted your loan and that you have met nearly all requirements. At this stage you can request a Pre-Approval Letter, lock-in your loan and take the next step to proceed with the lender.
  3. An approval means your loan was reviewed and approved by an underwriter and has been authorized for funding.

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