Pre-Approval versus Pre-Qualification

For a number of years now, sellers have preferred offers that are accompanied by a letter from a bank indicating that a buyer has the ability to purchase the property. These are referred to as pre-qualification letters or pre-approval letters.

Many people use the two terms interchangeably, but they do not mean the same thing at all.

A letter of pre-qualification indicates that a buyer has spoken with a mortgage lender. It means that the buyer has given the mortgage lender information about income, monthly debts, and assets. The lender runs an electronic credit report. Then, based upon credit score and the information the buyer gave the lender, the lender estimates the amount of the mortgage loan the buyer can afford. A letter of pre-qualification is basic and is completely unverified other than the credit score. The buyer is not required to submit documentation of income or assets.

A letter of pre-approval means that the buyer has gone through a more stringent process and indicates a firmer commitment from the lending institution. The buyer has completed an application and undergone a full credit check. The bank completes employment and income verification. Letters of pre-approval often specify that a buyer has the ability to purchase a specific property or to take on a mortgage of specific amount. Letters of pre-approval are not loan commitments; these must still be obtained to satisfy a financing contingency if one is included in the offer. However, a letter of pre-approval is a superior form of judging a buyer's ability to purchase when weighed against the letter of pre-qualification.

Either letter is better than none when submitting an offer to purchase, especially in today's economic times. Sellers want to know that the offer they are considering has a solid base in reality. Buyers should always make a mortgage lender their first stop in the home buying process.