Pre-Qualification, Pre-Approval – what’s the difference?

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To be, or not to be, that’s is the question. To pre-qualify, or get pre-approved, what’s the difference? There’s a big difference, and if you are looking to scoop up some real estate in today’s rocky credit market, it’s important to know the two apart.

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This is something I hear all the time: “Getting a loan won’t be a problem for me.” Or, how about, “I have a friend who is a mortgage broker, and he says based on my income and credit score, it will be easy to get a loan.” Talk about famous last words before your financing never materializes!

So here’s the the skinny. Pre-Qualification is basically what happens when your buddy the mortgage broker asks you how much money you make, and how much your expenses are, maybe he runs a credit report,and then issues you a spiffy letter saying “Based on So-and-So’s income, credit score, and blah blah, I have pre-qualified So-and-So for a purchase price not to exceed $XXX,XXX.”

Granted, this is better than a poke in the eye with a sharp stick. When you are going out to buy some real estate, leave the sharp stick at home and if you don’t have anything else, bring your pre-qualification letter with you. OK, not really, you can leave that behind when you’re actually out looking at properties, but you’ll want to have it handy for when you want to write up an offer.

Here’s where it gets a little rough: sometimes, even though a mortgage broker will pre-qualify you, he will write on the letter, “So-and-so is pre-approved to buy…” when in fact, they are not pre-approved to buy anything. So what’s the difference?

You’ll know the difference when you actually go to get pre-approved. Here’s how to tell if you are pre-approved:

1) It took at least several days of work to get pre-approved

2) Your mortgage broker kept asking you for lots and lots of documentation

3) You have an actual loan number from an actual lender (e.g. Wells Fargo, Chase, Washington Mutual).

The difference for pre-approval is that the lender, not the mortgage broker, has actually approved you for the purchase of a house. You have supplied the requisite documentation (and there’s a lot of it, usually) and you have passed through the lender’s underwriting process. At this point, the only missing part of the equation is the collateral – that is, the property you are going to buy. The lender needs to appraise it and make sure it meets the other guidelines for the loan.

Even if you think that you won’t have any trouble getting a loan, even if you have all the assurances in the world from your friends in the mortgage business – get pre-approved by a lender, not a mortgage broker very early in the home-buying process. This will likely save you much wailing and gnashing of teeth down the road.

Another benefit of pre-approval is that you will know what actual loan you will be getting. You’ll know the interest rate (although it may fluctuate), any points, any special features of your loan, etc. You will also at this point should be able to get from the mortgage broker a good faith estimate of closing costs, so you will know how much actual cash you will need to close the loan – and loans don’t come cheap! Of course, you may be able to get the seller to pay for your closing costs – in a market like this, it isn’t too tough.

If you are thinking of buying a house in the next several months, do yourself a favor: get pre-approved, now. The process may take longer than you think, and it will be very beneficial to know what your actual payments and closing costs will be long before you actually incur them.

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