Pre-approval vs. Pre-qualification

Pre-Approval or Pre-Qualifcation?
What's The Difference?

Provided by Jay Burnham, VP
Coldwell Banker Residential Brokerage

What's the difference between someone who is "pre-approved" for a loan and someone who is "pre-qualified?" Is one better than the other? And if so, how?

These questions arose from a letter I received and seemed worth pursuing -- after all, if one approach is better than the other, wouldn't that be helpful to borrowers?

In general terms, the idea behind pre-qualifying is this: You're a home buyer. You do not have enough money to buy for cash (do not be distressed, this makes you absolutely normal). The result: Your ability to buy depends on your ability to borrow, so it makes sense to speak with lenders before looking at houses to check your mortgage power and consider which loan program might be best for you.

So, lender Jones offers to "pre-qualify" you while Lender Smith has a "pre-approval" program. Which is better? Is there an a single definition for each term or an objective difference between them?

I asked a number of real estate folks about this and the results were interesting: There seemed to be three general areas of agreement:

• "Pre-approval" is likely to be a more formal process which includes a credit check and perhaps even an employment verification. "Pre-qualification" is likely to be an estimate of borrowing power.

• The definitions of each term are flexible: While a "yard" will be 36 inches each and every time, the meaning of "pre-approval" and "pre-qualify" varies fr om place to place, lender to lender, and who you ask.

• Neither a "pre-approval" nor a "pre-qualification" are seen as absolute loan commitments. Lenders still need to look at property appraisals, verify information, and in many cases, re-check credit before agreeing to make a loan.

If a pre-approval or pre-qualification is less than a full loan commitment, why should buyers bother? Here's why:

By speaking with a lender you can get an informed idea of how much you can afford, which homes are in your price range, and which loan programs might be best for you. This is important information

On the basis of your meeting, the lender can provide a "pre-approval" or "pre-qualification" letter suggesting in broad terms that you can likely qualify for "x" financing dollars.

There will be a caveat saying that the letter does not represent an actual loan commitment because the lender reserves the right to review the appraisal, verify credit and employment information, and take such other steps as it feels are necessary to reduce risk. Because they are less than absolute loan commitments, such missives are often called "hand-holding" letters.

By pre-qualifying or getting pre-approved you demonstrate to brokers and sellers that you're serious and that you have a good idea of what you can afford. For sellers, an offer from someone who has pre-qualified or sought pre-approval is to be preferred over an offer from someone who has never met with a lender and thus has little idea of what might or might not be affordable.

For additional information, speak with local brokers and lenders.

------------------------------------------------------------------------
Written by Peter Miller

JAY BURNHAM, VP
Coldwell Banker Residential Brokerage
PREVIEWS International® Property Specialist
54 Dodge Street
Beverly, MA 01915
978.233.2828

Designations Earned: CRB, CRS, GRI, RECS, SRES