PreQualification vs Preapproval, what's the difference?
Over the past 30 years, almost every client who has come to me for a purchase loan has asked me what the difference is between a PreQualification and a PreApproval. The distinction is an important one. It can mean the difference between receiving a final loan approval and losing that dream home.
And don't get me started on those ads that say “we can get you a loan approval in 10 minutes – right from your mobile phone”. (You know who you are, unethical mortgage companies).
Here's what all this means.
When a loan officer asks you how much money you make, what your credit is like and how much down payment you plan to make, then says you are qualified based on what you tell them, that's a prequalification. They often will even give you a prequalification letter.
A preapproval carries more weight. A lender who issues you a PreApproval Letter is supposed to have reviewed all your documentation – not just take your word for it.
The difference is that lenders often analyze income and debt differently than you do, so without viewing the actual backup documents, there is no way for them to know for certain that the numbers work for your size loan.
There are other factors you won't be aware of. You pay child support for example, but that doesn't show up on your credit. Or maybe a family member has added you to title on a property just for estate purposes, not realizing they might be handing you a financial liability in the form of property taxes and insurance. (The equity won't help you). I recently had a client who co-signed or a student loan for a friend, not realizing how it would affect her. Even parents who co-sign for a child's car may think that the child making the payments means they won't be counted. Nothing is farther from the truth.
You need a mortgage consultant who asks the right questions. What if you get a preapproval but once you actually apply for the loan and the bank begins digging deep, these additional debts come out. Because of the internet, the lenders find everything, even things you've forgotten or didn't realize were important.
I'm going off on a tangent a bit, but I want to get across that in actual fact, the terms prequalification and preapproval don't have a lot of meaning. A preapproval is good to submit with an offer. (don't bother attaching just a prequalification), but the deeper the mortgage consultant goes with you, the more valid the PreApproval will be.
Now, about those 10-minute approvals.
These are basically just PreQualifications. Here's why.
Computers process almost all mortgage applications. Numbers are fed into the system and the system comes back with an answer. As fast as the numbers are fed in is how fast you get an answer. But here's the rub.
The approval will list “conditions”. The conditions may be simple such as current bank statements or pay stubs. These are examined by a real living person. Yes, some of those still exist. That living person may see overdrafts, unexplained deposits, or deductions from a pay stub that they didn't expect. There are dozens of unexpected items that the bank may see that you didn't know were important. Supplying some of these conditions may be easy, but some may not.
So the next time you see an ad that says they can get you a loan approval in 10 minutes, I can probably get it in 9, if I type faster. But it is useless.
Protect yourself. Be upfront about everything right from the start and there won't be any surprises, for you or the seller.