Pre-Qualification vs Pre-Approval
It’s important to understand the difference between a mortgage pre-qualification from a mortgage pre-approval. Most people use the term pre-approval without really understanding what it means. People are simply more familiar with the term pre-approval versus the term pre-qualification. There is a big difference between the two terms.
A mortgage pre-qualification is when a mortgage loan officer takes the home buyer’s application, goes over their personal documentation (i.e. W2’s, paystubs, bank statements, tax returns, etc.)—and in some cases the mortgage loan officer only verifies the personal docs over the phone— runs their credit, and issues a pre-qualification based on their knowledge of underwriting guidelines and mortgage loan parameters. In many cases the mortgage loan officer will spin the loan through automated underwriting (computerized underwriting). If it comes back approved/eligible and the home buyer’s personal information stays the same, then the home buyer is good to go. However, if anything changes—home buyers debt-to-income goes up, liquid assets go down, they change the amount down, any little change for the negative—the automated approval has to be spun again. (Automated underwriting can be very sensitive to the slightest change in information.) A mortgage pre-qualification is not as strong as a mortgage pre-approval but it’s the most common form of letting a home buyer know where they stand in obtaining a mortgage.
With a mortgage pre-approval, the loan officer goes through the same process with the home buyer with the exception that they actually collect the home buyers personal documents and have it reviewed by an underwriter. The underwriter signs off on the personal documents and the bank issues a mortgage pre-approval. The mortgage pre-approval takes more time than a mortgage pre-qualification, but it is a more thorough way of making sure the home buyer qualifies for a mortgage. Plus, it gives the home buyer a head start once they do have an accepted offer on a house, because by submitting their personal documents they have already completed part of the loan process.