My goal is to hopefully shed some light on what the difference is between pre-approval and pre-qualification so you, the buyer, can know what level of financial disclosure YOU should expect or ask for. I would hope no one would want to enter a transaction to purchase a home without the end result being a successful transfer of the property from a seller to a buyer. Therefore, when initial data is supplied from a home-buyer related to their income, assets, and credit reputation, a lot of latitude, at times, is granted on the accuracy of the information. Some lenders will, at minimum, access a credit report and verify history as well as amount of obligations and monthly payments. However, most income and asset information is exchanged initially on a ‘trust’ basis for accuracy in order to generate the coveted “lender letter”.
There are some very important fundamentals for the buyer to understand as it relates to pre-qualification versus pre-approval. If you are looking to purchase a home and in your recent history (yes, I am going to leave “recent” a little vague as it may vary relative to specific circumstances), you have:
- Non-continuous employment,
- claim unreimbursed expenses from your employment,
- file self employed and have no idea how your accountant calculates your tax,
- derogatory credit reporting(s);
- or have unusual sources from some recent money transactions (unusual meaning anything other than employment related).
You might want to exchange some very detailed information with your mortgage loan officer. I would suggest a Pre-Approval process. This will or should involve the completion of a mortgage loan application and disclosure package with a property address “to be determined”. The lender will fully process and approve a loan application subject to ratified purchase agreement and subject property appraisal. Typically, lenders will do this without a charge, or a with very minimal charge. Because income and assets are validated and the loan is fully processed and underwritten, the action would create a “Pre-Approved” buyer. Hence, the language and wording should reflect “Pre-Approval”.