Which is better and What is the difference?
When buying a home, cash is king, but most folks don’t have hundreds of thousands of dollars lying in the bank. Of course, that’s why obtaining a mortgage is such a crucial part of the process. And securing mortgage pre-qualification and pre-approval are important steps, assuring lenders that you’ll be able to afford payments. However, pre-qualification and pre-approval are vastly different. How different? Some mortgage professionals believe one is virtually useless.
“I tell most people they can take that pre-qualification letter and throw it in the trash,” says Patty Arvielo, a mortgage banker and president and founder of New American Funding, in Tustin, CA. “It doesn’t mean much.”
Is Fully underwritten the best choice?
A fully underwritten pre-approval is the best and most comprehensive mortgage pre-approval a homebuyer can receive when they want to buy a house as it is actually a conditional mortgage approval. The key difference compared to a standard pre-approval letter is that the mortgage lender performs the majority of the underwriting process before a homebuyer even makes an offer rather than after a purchase agreement is signed. Some benefits include:
- Close on a home purchase faster
- Waive contingencies to compete with all-cash buyers
- Achieve a potentially better price
- Participate in later rounds of a bidding war
Speed creates more certainty for sellers. If a buyer is already approved for the loan amount from pre-underwriting, they are able to close much faster than a traditionally pre-qualified buyer that would still need to complete a formal underwriting process.
What is mortgage pre-qualification?
Pre-qualification means that a lender has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount.
But here’s the rub: Most often, the pre-qualification letter is an approximation—not a promise—based solely on the information you give the lender and its evaluation of your financial prospects.
“The analysis is based on the information that you have provided,” says David Reiss, a professor at the Brooklyn Law School and a real estate law expert. “It may not take into account your current credit report, and it does not look past the statements you have made about your income, assets, and liabilities.”
A pre-qualification is merely a financial snapshot that gives you an idea of the mortgage you might qualify for.
“It can be helpful if you are completely unaware what your current financial position will support regarding a mortgage amount,” says Kyle Winkfield, managing partner of O’Dell, Winkfield, Roseman, and Shipp, in Washington, DC. “It certainly helps if you are just beginning the process of looking to buy a house.”
Why is mortgage pre-approval better than pre-qualification?
A pre-approval letter is the real deal, a statement from a lender that you qualify for a specific mortgage amount based on an underwriter’s review of all of your financial information: credit report, pay stubs, bank statement, salary, assets, and obligations.
Pre-approval should mean your loan is contingent only on the appraisal of the home you choose, providing that nothing changes in your financial picture before closing.
“This makes you as close to a cash buyer as you can be and gives you a huge advantage in a competitive market,” says Lea Lea Brown, a mortgage banker. Brown says. “The reliability and simplicity of your offer stand out over other offers,” Brown says. “And pre-approval can give you that reliability edge.”
So take notice, potential home buyers. While pre-qualification can be helpful in determining how much a lender is willing to give you, a pre-approval letter will make a stronger impression on sellers and let them know you have the cash to back up an offer.