If you read our reports you are aware we recommend that as a buyer you have a loan pre-approval, not simply a loan pre-qualification. Questions arise among our buyers as to what are they. And to confuse folks even more there is loan commitment. It is not unreasonable to get ten different answers from ten different loan officers if you were to ask for the differences. I will try to explain some of the differences as we see them here at Vermilion Realty.
Usually pre-qualification comes about when a loan officer or mortgage broker asks you a number of questions. Each loan officer has his or her favorite questions so you will not find 100 percent agreement among them as to what is key. Generally they will ask about income, debt load, length of employment, etc. From your responses, both what you say and how you say it, they may grant you a pre-qualification. They will tell you that based upon what you said they could probably get you into a loan of a certain amount. Keep in mind your loan is highly susceptible to change until the loan officer receives and reviews your documentation.
A loan pre-approval generally means the loan officer has your financial records and has pulled a credit report. The documentation includes a loan application, two prior years tax returns, pay stubs, bank statements and records of other assets such as pension funds, IRA, security accounts, etc. The loan officer will very likely run your data through an automated underwriting system and will come back with an approval for a maximum amount. Having a pre-approval letter is almost the same as cash. We say almost for the loan is not yet tied to a particular property and things could yet change. Regardless, with a pre-approval, we negotiate with a seller on your behalf with the knowledge that you are nearly one hundred percent certain to get a loan. We negotiate as if you had cash.
Now we have the commitment letter. The only difference between this and pre-qualification is now we have a property address. The commitment letter will outline specific requirements for the loan to be finalized; for example, an appraisal and clear title.
I hope this clarifies the differences and we still encourage buyers to get that pre-approval letter before looking at property. If you wait until you find just the right property to get approval, you could be adding a couple of weeks and more stress to the purchase process.
Don Grafues
