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Pre-Qualification or Pre-Approval?

Posted by Tom Erickson on Sep 11, 2014 11:30:00 AM
Pre-Qualification | Pre-Approval

The CFPB has recently tried to clarify the difference in these two processes.  Their “Pre-Qualification” definition states:

 

Pre-qualification is a lender’s estimate of how much you could be eligible to borrow. You may be asked to supply information about your income, savings, assets, and debt. The lender will review this information and decide how much you might be able to borrow. Prequalification does not mean you will get the loan. But consider making a prequalification request to help you decide on a price range for your new home. Pre-qualifications are usually free.”

 

This usually entails a potential customer verbally supplying the above information and the Lender calculating a potential scenario with standard industry ratios and credit standards.  Typically this information is not verified and is used to get a client in the “ball park” of the amount he may be able to borrow.  This usually would not be accepted in a real estate transaction, where the seller/listing agent requires proof of the borrower’s ability to obtain a loan because of the limited amount of verification that was done.

 

The CFPB has also defined “Pre-Approval” as:

 

“To be pre-approved for a mortgage loan means that a lender has evaluated your creditworthiness and has made a commitment to extend you a loan up to a specified amount. The pre-approval will say how long it is valid for and may contain some other conditions for you to get the loan. But in general, a pre-approval means that the lender is ready to make you a particular mortgage loan based on the information you provided at the time of your pre-approval.”

 

This means that the Lender has taken significant steps to verify the income and credit information that was supplied by the borrower.  They have probably collected W-2s and paystubs, ran the credit report, collected bank statements, and other valid checks.  The pre-approval is for a specific loan amount and should state the loan type, length of time it’s good for, and any conditoned items.  Most will make an exception for the conditions contained in the title insurance checks and appraisal conditions.  This is the type of approval that sellers/listing-agents normally require before accepting an offer to purchase and taking the home off the market.

 

With Mortech's mortgage pricing engine, you can pull a borrower's credit information directly from one of our many credit partners for more accurate pricing.

 

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