At one point, it wasn’t as difficult to get a mortgage loan. Back in the real estate boom of 2005-2007, there were less restrictions in place. A home buyer could easily get a pre-qualification letter from their mortgage broker and that would usually suffice.
Then, we all know what happened. Too many unqualified borrowers got loans and bought homes way beyond their means. The real estate bubble burst and it wasn’t good for anyone. Since then, a lot has changed in the mortgage industry. Many more regulations are in place and some are constantly changing, making the loan qualification process is significantly more stringent. Today, a pre-qualification letter holds less weight. Pre-approval is what you want as a home buyer and it is what home sellers want to see when they get offers.
First, let’s explore the differences between pre-qualification and pre-approval.
Pre-qualification is a simpler procedure. A buyer will fill out a loan application and provide their support documentation. The mortgage professional will review this and also run a credit check. If everything looks good, a pre-qualification letter is generated. Even though no specific property is considered, the pre-qualification will usually set a qualified amount based on the criteria reviewed.
It’s important to understand that a pre-qualification is determined by a mortgage professional, whether it’s a loan originator, broker or banker. It is not in any way an officially approved loan or final amount. It just states that the borrower appears to be a good loan candidate.
Pre-approval on the other hand, is conducted by an actual underwriter. They are working on behalf of the bank or lender, not the loan originator. Underwriters are the ones who actually determine when loans get approved for specific applicants, so naturally their analysis is more meaningful than a mortgage professional’s will be. Pre-approval is a more detailed process to show if the applicant has the ability to qualify for a loan up to a specified amount of money. It will also carry with it certain contingencies and specific requirements of what else will be needed to complete the loan when the time comes. That said, it is still not an actual approval of the loan. Nothing is official until the final underwriting process takes place.
Why You Want a Pre-Approval
Because of these important distinctions, a pre-approval does hold a lot more intrinsic value than a basic pre-qualification. It will make the Realtors on both sides of the deal much more comfortable when offers are made/accepted and before the property goes into escrow. Pre-approval represents a reduced risk for everyone involved in the transaction.
A pre-approval may take a few extra days to complete. It is worth it, though. Price negotiations will go smoother and the final loan approval process will likely go quicker.
When we work with home buyers at Transparent Mortgage, we highly recommend they get a mortgage loan pre-approval. It pays to take that extra step, especially in today’s market where mortgage lending is heavily scrutinized. We’ve had great success with this approach and it is a big reason why we are able to maintain a 95%+ closing ratio.
For more information about pre-approval or to get started on your mortgage loan pre-approval before buying a home, contact us at Transparent Mortgage.