We all have that friend that thinks she is the state appointed District English Attorney in charge of making sure no one around her ever makes a grammatical error. You’re, your. Their, they’re, there. Oh my. I know it’s tacky to misuse terms like that, but most of the time it’s an honest mistake of no consequence. Prequalification, Pre-Approval, and Loan Approval, however, are three terms that sound similar but that misunderstanding can cause real financial damage.
These three levels of qualification really represent stages in the loan approval process, and if you are not familiar with how the mortgage timeline works, it can be confusing to determine which stage you are entering. If you are unclear about just how deep into the approval process you are, and how that impacts factors like your earnest money, closing date, or extension fees than you can make end up inadvertently costing yourself money if something goes awry. Unfortunately, having issues during a mortgage is no longer really an “if”, but these days, more of a “when”.
So what is the difference between the three, and what does that mean for you?
The first step in the loan process is simply to talk to your Loan Officer (LO) about whatever it is you are trying to do, and make sure it makes sense in theory. Often, this step is done BEFORE selecting a home, or really even before you start your home search. Many people have no clue how much they can really be approved for when they apply for a loan. They may have a general sense of what they can afford, but in my experience, the bank has their own idea that can be quite different. Having this conversation with a mortgage professional can be quite illuminating, and save you time that is often spent looking at homes that are not feasible. Your Loan Officer will ask you questions regarding your goals, income sources, income amounts, asset types, asset amounts, credit history, debts and payment obligations, and long term plans. Using this information, he will be able to give you a good idea of how much home you can afford. Remember, it is often not just about how much monthly payment that fits into your, but how much cash you have ready for a down payment or how much Entitlement you have available.
In a Pre-Qual, no credit report is pulled, and you should walk away with a generic letter from your LO that simply states “based on our conversation, I believe you may qualify for ‘X’”, where X is a proposed Sales Price of a new home.
In a Pre-Approval, you take the next big step past Pre-Qual and you ask that the lender pull and analyze your credit report. At this point, you are no longer dealing with hypothetical credit score or debt information, you are going right to the source for actual numbers. If you qualify from a credit standpoint, and your stated income is enough to qualify based on your verified debts, you will receive what is called a Credit Approval Letter.
Are you ready for the most important sentence of this entire piece?
In almost every case, this is not a firm offer to lend money, and it is not your final approval.
I have seen so many people make the mistake of clearing contingencies or selling other properties or making other irreversible mistakes because they thought that once they had this letter they could not be declined. In most cases, if you are holding just a Pre-Approval Letter, you have not even received an appraisal yet. In some cases, your income isn’t even verified. At this point, please, remember that plenty can still go wrong. Here is a quick list of a few examples. There are thousands of things that could happen, but here are the most common problems that happen after you are pre-approved:
- Appraisal comes in with low value
- Appraisal comes in showing damage or issues with the property making it ineligible for lending
- Bank determines part or all of your income is disallowed
- New home property taxes are higher than estimated, and now you can’t afford the home
- It’s been more than 120 days since the bank pulled your credit, and now they have to re-pull—so they discover that you bought a new car, or took out a new credit card, or that your balance is higher…and now you don’t qualify.
Sometimes called Full Approval, or Final Approval, this is the point where you can release you Financing Contingency and have confidence that the bank is approving you to buy the specific home in question. If you have Final Approval, the bank has approved your income, reviewed and approved your appraisal, and is issuing you a firm commitment to lend. This happens usually about two weeks before your closing date, but lenders vary greatly on the timing. Some banks will allow some conditions to be left outstanding, but other banks will wait until they have cleared all conditions. If you get to this point, congratulations! It means you are very close to closing on that new home of yours. There is always a chance something unexpected could still occur, so make sure you understand what conditions, if any, are still outstanding.
While this is a brief overview of key points on the subject, there are thousands things that could be discusses. Yes, I keep saying thousands, but I mean it literally—some people don’t realize that there are several THOUSAND factors that determine whether or not you ultimately get approved for a mortgage. If you would like more information on this subject, please reach out to mike@VAFinances.com.
 At this point, you can also choose to provide documentation of your income to make the Letter more valid. It carries no extra weight, but at least you have a truer idea for what you qualify.
 Title of the letter will vary by lender, but intent of letter is fairly consistent.
 Basically, telling the seller you are Approved and they can now keep your earnest money even if you do not close on the home.
 I could write a novel about the crazy things people do to ruin their credit profile while buying a house.
 Like property tax or home insurance amounts, which can be dangerous.
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