Pre-qual vs. pre-approval - know the difference!

I run Mortgage Education classes in the Phoenix area for real estate agents. Newer agents in my class usually ask me the difference between a pre-qual and a pre-approval. I recently saw this post by Randy L. Prothero and I was going to comment on it before I realized I really want to address this question in detail on this forum.

Pre-qualification is when the loan officer takes the basic asset, income and debt informationn and determines how much of a loan the borrower qualifies for. Often this can be a simple calculation on your financial calculator. The originator may or may not pull credit for this. However, any professional would. Even if credit is pulled, at this stage there is no commitment form the lender and the "answer" is really tentative. It's almost like sitting next to someone on a plane and after a very brief conversation determining that they might be able to buy the $500,000 home if everything about what they say checks out!

Pre-approval is when then loan officer takes a full application determines which programs the borrower qualifies for and then is able to obtain some form of "approval". For example in the standard FannieMae or FrediMac programs you can run the borrower information through an automated system. The system then gives an approval level with conditions which need to be fulfilled. This oftentimes will mean employment, income, asset verification etc.

Not all programs have an automated system. However, a seasoned loan originator or someone who really does their homework will plow through the loan guidelines and look for any problems with getting the loan approved. It takes a lot more work but such a manual review usually catches most things. I usually do this even when I feel comfortable with the program I'm using, since I can never be sure what might have changed in this climate.

At CTX where I work we have access to our underwriters and we can check scenarios with them to make sure any items on a particular program will not cause problems. For example recently, I had a borrower who owned a manufactured home on leased land. While all aspects of the loan checked out this one particular issue stuck out. I was able to get the issue clarified by an underwriter before I issued any kind of pre-approval with my name on it!

There is so much confusion on the topic that most loan originators do not even know the difference. Next time you run into a situation ask the loan originator the difference between a pre-qual and a pre-approval. If you don't like the answer they give you then it might be wise to dig a bit deeper into the paperwork on the borrower.

Let me know if you have questions. I'd be more than happy to help with any concerns you might have.