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The Difference Between Pre-Qualified and Pre-Approved
You will hear these two terms being used interchangeably. But in fact, there are very significant differences between being pre-qualified for a mortgage and pre-approved for a mortgage. This distinction can make the difference between knowing your contract is solid at the beginning of the transaction or having it fall apart in the middle.
Being pre-qualified for a mortgage essentially means the buyer has spoken to a loan officer or has made online application for pre-qualification. Generally speaking, the buyer has provided their income, their debts, their assets and usually, their social security number for a credit check. The lender then runs the credit check, computes the debt to income ratios based on the information provided and gives a nod to pre-qualification. This pre-qualification is subject to all information being verified and foundsatisfactory to the lender. This is where potential difficulty is possible. For instance, if the buyer provided information about their income that seemed right to them, but the lender calculates the income a different way (usually in the case of self-employed or commissioned individuals), the income will not hold up and the loan can possibly be rejected. Or, a buyer provides an asset amount to be used for down payment and closing costs and it is later discovered that the buyer is borrowing the money from his father. The buyer thought the money would simply be counted as his, but the lender doesn’t accept this source of funds. The loan could ultimately be rejected. Pre-qualification is a step in the right direction, but it is only a step.
Pre-approval, on the other hand, actually requires the buyer to provide all the necessary verification to support the loan application. This generally includes bank statements, pay stubs, W2 forms and credit report. When the lender issues a pre-approval, it is just that an approval. It is subject only to the buyer finding an acceptable property within the pre-approved price range and having a satisfactory appraisal completed. Of course, problems could still crop up with the appraisal, but a pre-approval is a much stronger and more certain position. Most lenders are happy to issue a pre-approval within a few days of loan application.