Pre-Qualified or Pre-Approved?

What’s the Difference?

There are three levels of services provided by mortgage lenders regarding basic qualifying for a mortgage.  Pre-qualification, pre-approval and firm commitment are the three levels of services.

The pre-qualification process is very simple and takes about fifteen minutes.  This can be done over the phone upon first contact with a mortgage lender.  Basically, the loan originator will interview the potential borrower, asking questions regarding income, debts and assets.  This type of qualification is preliminary and is subject to verification of income, credit rating, and assets.  It is a good idea for a buyer to take this step before viewing homes for sale, to get an idea of the price range to look in.

The pre-approval process is a more detailed, formal procedure.  The pre-approval involves an actual application form being completed and all the appropriate information and documents are gathered before the home is purchased.  A full tri-merge credit report is obtained and the entire file is submitted to an underwriter for review.  If acceptable, the approval is generally subject to a fully executed sales contract and a satisfactory appraisal of the home.  The pre-approval gives both the buyer and seller peace of mind by alleviating the concern of a loan denial.  Usually, a lender will collect a fee at the time of application to cover the cost of the full credit report and the fee may be credited toward closing costs.

Once an offer on a property has been accepted by the seller, a firm commitment for a mortgage can be issued to a borrower.  This is done after an underwriter has reviewed all income, assets, debts and an appraisal.  An additional fee is usually collected to apply toward the appraisal cost.  Again, this fee it may be credited toward the closing costs.

When you are buying or selling a home, it is important to know the differences in these three types of services.  Many misunderstandings are caused by buyer and seller interpretations of the meaning of these terms.  They are not interchangeable!  It is important that you make your home buying/selling decisions based upon an accurate understanding of the lending institution’s financial involvement.

6/12/00

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