Pre-qualification vs Pre-approval

Here in my local area, houses that are reasonably priced and in reasonable shape are flying off the market, over the past year we have transitioned from a buyers market to a sellers market, there is a lot of competition among buyers for quality properties and as such you want to be able to submit the strongest offer that you can. In order to do that, it helps to understand the difference between a pre-qualification and a pre-approval .

Pre-qualification

This is the process that most buyers go through, they speak to a loan officer, reveal as little as possible and get a pre-qualification letter to show their realtor in order to start viewing houses and submitting offers. The quality of the pre-qualification depends greatly on several factors

1. Honesty of the buyer
   many times the pre-qualification can be done without seeing any documentation at all, the loan officer just takes what the buyer says at face value. Most times, this is perfectly fine as the potential buyer is honest and up front with the loan officer, however there are times especially when dealing with a buyer that last purchased a house in the 2006 - 2008 range and experienced stated income, stated assets loans that this can be problematic.
2. The Loan Officer's knowledge in several area's
1. Agency Guidelines
   The loan officer better have a good handle on what FNMA, VA, FHA Freddie Mac or whoever the loan is going to be insured by will allow and what type of documentation is required
2. Lender Overlays
   Just because FNMA or FHA will allow something does not mean that the lender the file will be submitted to will actually accept the documentation. Many times the lenders are more restrictive than the agencies and will require additional documentation or have additional restrictions.
3. The Underwriters they are working with
   This is especially true in cases where you are looking for some sort of exception, or are looking to overcome a poor credit history or high DTI. The agency guidelines tend to give underwriters a lot of discretion when there is a buyer that doesn't meet the ideal credit profile usually citing "strong compensating factors" to ignore a rule or allow a slightly higher tolerance on a qualification parameter. This is a highly subjective phrase, and it helps to know the people that will be reviewing the file to get a gauge for what they consider "strong"

Pre-Approval

Pre-Approvals are different in that they alleviate many of the issues facing a borrower with a pre-qualification letter. For instance in order to obtain a pre-approval, the documents backing up the claims of income and assets must be submitted, this ensures that borrowers are not trying to stretch the truth a bit in order for their application to look stronger. Also we must remember that most borrowers don't know how the lender will view their situation, for instance a lender looks at w-2 income vastly different than 1099 income. Many times a potential buyer will come in after a recent promotion and thinking they are ready to purchase home come in and say I make x amount per moth, and when we receive the documentation we realize we can only count 1/3 of that income because it must be averaged over 2 years. The requirement that the documents be reviewed by an underwriter eliminates any stretching of the truth , intentional or otherwise

Also an underwriter will have reviewed the file, they have already looked at their guidelines and made any decisions on potential exceptions or extenuating circumstances, there is no ambiguity regarding what a given underwriter may think regarding a situation, you already have a decision and condition list to know what you need to obtain for a final approval.

Here at Freedom we will produce a loan commitment with out pre-approvals making the buyers offer stronger as you have basically eliminated the need for a financing contingency, we don't have to worry about obtaining a loan commitment in 10 or 15 days, A loan commitment has been submitted with the offer.

Review

The pre-qualification is a good fast and easy way to know that the potential buyer at least has a decent shot at good shot at obtaining financing. The difference is basically a prequalification says my loan officer is confident he can convince an underwriter to get me a loan, the pre-approval says my underwriter has said I can have a loan once I provide these conditions. I have been told that FNMA is now requiring pre-approvals in some cases and with the competition that is out there in this market it can only help your chances of securing a contract on the house you desire. There really is not a downside to the pre-approval process, if you start there, I am typically receiving loan commitments on the business day following submission of the application and correlating documents.

If your lender offers a pre-approval process I highly recommend it, I can't speak for every lender out there but for Freedom Mortgage the process is fast and free, and besides if the Loan Officer you are working with thinks enough of your file the submit it for a pre-approval than if the house of your dreams comes available while you are waiting for the loan commitment, there shouldn't be any issues in getting a pre-qualification letter to fall back on.