What Is The Difference Between A Pre-Qualification & A Pre-Approval?
Portland has one of the hottest housing markets in the country. For a home-buyer the difference between being “pre-qualified” and “pre-approved” is key in having an offer accepted instead of ignored. Furthermore, there are even varying degrees of pre-approval that can impact a buyers chances of purchasing the home they want.
Pre-qualification simply means that a loan officer has interviewed a potential home-buyer and recorded information regarding their income, credit history, obligations, and assets. Based on the information shared in that conversation the loan officer believes the home-buyer will be able to obtain a home loan. However, none of the information regarding the home-buyers financial situation has been substantiated and therefore is not deemed reliable for a mortgage underwriter who is ultimately the one who makes the determination on whether a home loan application will be approved (or not).
When a home-buyer has been pre-approved, it means that the loan officer has received a completed home loan application (contact information, residency history, employment history, income, assets, other obligations, and other real estate owned). In addition, a pre-approval requires that a loan officer has also obtained a copy of the applicant’s credit report and determined that the person is in fact eligible to obtain a home loan.
However, here at Swanson Home Loans we recommend taking the pre-approval process one step further. In addition to the aforementioned loan application and credit report, we typically require an applicant submit supporting documentation. This allows us to review it and verify that the information supplied on the loan application does match the financial documentation that the underwriter will eventually review. Often times this involves having the applicant submit pay-stubs, W2 forms, copies of previous year’s federal tax returns, asset account statements, etc. In fact, we even have a member of our team who is a trained underwriter and reviews all this documentation prior to issuing a pre-approval letter.
These additional steps offer a couple benefits for the home-buyer. First, it allows us to issue a pre-approval letter that explicitly states that these additional measures have been taken which communicates to the seller that there is very little that can go wrong with the home loan process. In a competitive offer situation a home-buyer who has “crossed more hurdles” is closer to the finish line and will win out against another buyer who has only obtained pre-approval based on their application and credit report. The seller bares less risk without approach.
Second, by taking these steps before the home-buyer makes the offer it is one less thing they have to worry about when they enter into the process of completing their inspections and submitting their earnest money. In addition, it also positions us to possibly process the loan quicker and offer the seller a quicker closing schedule (which may be another compelling reason to accept the offer over others).
In summary, the steps a home-buyer takes to arrange their financing upfront is analogous to the old adage in the field of computer programming: “garbage in, garbage out”. When a home loan applicant does the least amount of work upfronanissat, the pre-qualification/ approval a lender delivers is inherently less reliable than an applicant who took additional steps upfront to submit a complete application.
Hopefully this piece is helpful for you and your search. Please let us know if we can be a further resource to you. Also, if you have any personal experience with this topic I invite you to comment!