The Real Difference Between a Prequalification and a Preapproval

AUG 21, 2014 10:54am ET

On the Consumer Financial Protection Bureau's website, the regulator gives its answer to the question, "What's the difference between being prequalified and preapproved for a mortgage?"

The CFPB's definition doesn't really tell the full story real estate professionals need to review any letter representing a buyer's ability to obtain a mortgage with great care and scrutiny, no matter what the letter is called.

Today, some banks have made the decision to not issue pre-approval letters due to the cumbersome regulatory environment, so they may call their letter a pre-qualification. Lenders licensed as mortgage brokers can't issue a pre-approval letter because they aren't licensed to approve loans. Some lenders issue letters based on a simple conversation with the borrower and call them pre-approvals; some lenders have borrowers submit information though a website that churns out pre-approval letters without any lender review; some lenders issue letters only after a thorough investigative process.

What matters is the process used to get the answer not what the letter is called, but what it says.

When evaluating a pre-qualification or a pre-approval letter on behalf of a seller, this is what you need to look for.

Does the letter contain the following?

The purchase price

The loan amount

An expiration date

Names and addresses of all buyers

Percent of the down payment

Loan type (Conventional, Jumbo, USDA, FHA, VA, etc.)

Loan term (fixed or adjustable, 30 years or 15 years, etc.)

Whether or not the transaction is dependent upon the sale of another property

Status of the property being sold (on market, under agreement)

Contact information for the loan officer and his or her Nationwide Mortgage Licensing System number

Lender name and licensing details

Next, you need to ask yourself an important question: "Do I know and trust this loan officer/institution?" Do not hesitate to call the loan officer and interview them on their process.

If the letter doesn't state what documentation has been reviewed as a part of the process, then you should ask if the loan officer has reviewed the following:

Two years of federal tax returns

Two years of W-2s

One month of paystubs

Two months of asset statements checking, savings, investments to verify the source of down payment.

Credit report

Any additional documentation needs that arise out of the client interview

Don't take a letter from an unknown lender at face value. A high percentage of purchase transactions fall apart due to financing issues.

It doesn't matter what the letter is called it matters that the lender and the buyers worked together to ensure that the transaction will close on time. It matters that the lender is thorough, detailed and transparent about their process.

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