Mortgage Pre-Approval versus Mortgage Pre-Qualification
Is there a difference between Mortgage Pre-Qualification and Mortgage Pre-Approval?
Are you considering starting to look to see purchase a home? Are you considering taking advantage of the Historically Low Mortgage Interest Rates?
Before taking the time to drive around looking for a home, before taking the time to visit Open Houses and before taking the time to meet with a REALTOR? to look at homes, contact a Mortgage Lender to review the mortgage process and obtain Mortgage Pre-Approval.
The reality in purchasing a home: most buyers need to obtain a mortgage to buy a home. If purchasing a home and paying cash is not a consideration, and obtaining a mortgage is required, wouldn’t it make sense taking care of the mortgage details first?
The Purchase Price consists of a down payment plus the mortgage amount to be borrowed. The Mortgage Amount is determined by income qualifications, credit and other important criteria.The Mortgage Payment includes Principal and Interest, Monthly Real Estate Taxes and Monthly Home Insurance, commonly referred to as PITI, and PMI or MIP (private mortgage insurance or mortgage insurance premium), if applicable. Association Fees, if applicable, will also be included in the Mortgage Qualifying calculation.
Mortgage Pre-Approval serves two important purposes. First, it provides the Buyer with the amount of mortgage they can qualify for and the estimated monthly mortgage payment. Not only is that information particularly important to the buyer themselves, but it becomes even more important in the process of searching for a home and making contract offers to purchase a home. Most experienced REALTORS? require their clients to have Mortgage Pre-Approval and, more importantly, very few home sellers will even consider a contract offer without Mortgage Pre-Approval.
Many buyers have asked, “is there a difference between a Pre-Qualification and a Pre-Approval” or “does it make a difference if I have Mortgage Pre-Approval or Mortgage Pre-Qualification”? These terms appear to be similar but are in fact quite different. Not only do they cause confusion for home buyers, but there seems to be many interpretations from those in the real estate and mortgage industry as well.
Speaking as a REALTOR?, the difference is documentation and verification. In other words, is the buyer providing copies of their W2 form, income paystubs and bank account statements to the Mortgage Lender in the pre-approval process or is the Mortgage Lender simply relying on verbal information provided by the buyer? More often than not, the difference between the two terms is that one is issued without any verification of information and the other starts with the buyer providing written documentation of all information submitted. While neither is a considered to be a mortgage commitment, nor a written mortgage guarantee, obtaining a Mortgage Pre-Approval letter is more preferred than obtaining a Mortgage Pre-Qualification letter.
Based upon my experiences in selling real estate and helping buyers obtain mortgage financing, Mortgage Pre-Qualification is generally a process where a buyer contacts a Mortgage Lender/Mortgage Rep, often on the phone, who then asks the buyer to provide some information such as current address and how long living there, social security number in order to obtain a credit report, down payment amount and annual income. I assume a credit check authorization form is signed by the buyer and faxed to the Mortgage Lender. After the credit check is ordered and received by the Mortgage Lender, the Mortgage Rep then estimates the amount of mortgage the buyer can afford and sends(via fax or email) a letter to the buyer with the title Congratulations, You Are Pre-Qualified, for a mortgage loan in the amount of $___________ and a purchase price of $__________. This is usually done within a half hour or so of the initial phone call, and at best can be described as an estimate of borrowing ability, and not Mortgage Pre-Approval.
In the Pre-Qualification approval letter, varying type disclaimer information is always included such as: subject to a formal mortgage application and payment of a mortgage application fee, subject to verification of employment, subject to verification of assets, subject to credit review, subject to mortgage underwriting guidelines, interest rate to be the prevailing rate of interest for the mortgage type applied for, among many other subject to statements. In other words, we will give you a mortgage when we see that the information you verbally provided is correct.
What kind of problems could arise when a formal mortgage application is submitted by the buyer after they have obtained a Mortgage Pre-Qualification letter like the one just reviewed? The mortgage application process involves somewhat standard underwriting criteria and guidelines for each type mortgage, whether VA, FHA, Conventional and variations of each.
The Buyer does have a Pre-Qualification letter, but how reliable is it if important information such as income, debts and assets, while assumed to be correct and accurate, have not been verified with copies of paystubs, savings account statements, charge card statements, etc.? Yes, it is possible that the buyer provided correct information and will obtain a mortgage commitment when a mortgage application is submitted. However, there are many circumstances where even though the information verbally provided is accurate, certain other details are not mentioned which may have a negative impact on the mortgage approval process; details such as income being off the books and not reported to the IRS, down payment being borrowed(not gifted from a family member), savings for the down payment only but no additional savings for real estate closing costs, cash reserves if required and perhaps inconsistency in work history to name just a few situations that can cause problems in obtaining mortgage approval. While Pre-Qualification letters like the previous example are common, not all Mortgage Lenders provide Pre-Qualification letters in that manner.
Since the mortgage application and approval process involves a credit check, income verification and asset verification among other criteria, many Mortgage Lenders require a more thorough process in providing Mortgage Pre-Approval. In addition to obtaining a credit report, many Lenders require the buyer to provide proof of two years of income, pay-stubs or income tax forms, copies of bank statements and copies of charge card statements.
When all the verification information is received and the credit report is obtained, it is then submitted to the Mortgage Underwriter for review and approval, who then issues the Mortgage Pre-Approval letter. In fact, the Mortgage Pre-Approval letter is worded something like this: Congratulations, You Are Pre-Approved for a mortgage loan in the amount of $________ and a purchase price of $__________ subject to a Contract of Sale and a satisfactory Bank Appraisal on the home being purchased. While more time consuming than the previous Pre-Qualification practice discussed above, it is more thorough and more reliable. And it provides an additional benefit, which is the shortened time frame required in obtaining mortgage approval as it generally only requires obtaining a Contract of Sale and an appraisal of the property before the issuance of a firm Mortgage Loan Commitment.
Consider the advantages of this type Mortgage Pre-Approval. First of all, there is the confidence for the buyer in obtaining a written mortgage commitment for the home they have just signed a contract for and the home they have already made an investment in; hiring an Attorney for contract review(varies by State) and hiring an Home Inspector to perform the Home Inspection, Termite Inspection, Radon Inspection and any other required due diligence inspections. Needless to say, I can’t even count the number of real estate transactions I’ve heard about that fell apart after the buyer paid for the bank appraisal and all the inspections due to the buyer not being able to obtain mortgage approval, even with a Pre-Qualification letter. That is a lot of time wasted and money spent for the nothing! It just doesn’t make sense!
Even more important is the benefit in negotiating with a seller in the purchase of a home, something that can make the difference of being the buyer who gets the signed contract or being able to negotiate a better price. The Mortgage Pre-Approval provides comfort to the seller and REALTORS? in knowing that they have a serious buyer and one who has already taken the most important step in buying a home, arranging the financing first!
Help yourself negotiate for a better home purchase.
Contact a REALTOR or Mortgage Lender to discuss obtaining Mortgage Pre-Approval before you get in the car to look at houses! It is worth the effort, trust me!
For additional Artcilces, Visit www.JustRealEstateTalk.com
David Fialk, Realtor Emeritus
C2EX, CRB, CRS, ABR, GRI, e-PRO
www.DavidFialk.com