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  • Writer's pictureTeam Pinto

Mortgage Preapproval Vs. Mortgage Prequalification; What You Need to Know

One of the first things that most real estate agents will discuss with homebuyers they are working with - or should anyway - is the importance of being able to prove to homesellers they are serious, via a mortgage qualification or mortgage preapproval.

The question that some real estate professionals do not ask their buyers - but again, really should - is do you understand how mortgage preapproval differs from a mortgage prequalification?

There is often confusion among those looking to buy a first Waterloo Region home and qualify for a mortgage loan about the difference between a mortgage pre-approval vs. a pre-qualification letter. First time home sellers are sometimes confused by the issue too.

Indeed, they sound very similar, but confusing these terms before or during the hectic period when considering purchasing a new home can only add to the frustration of inexperienced buyers.

In order to prepare properly when buying your first home, you need to know the difference between these two mortgage terms. And the same applies, as we mentioned, to those who are selling a home for the first time.

In every real estate transaction, home sellers want to know you can really afford to buy their property. The best way they can assure themselves that the buyer is well qualified to make the purchase is to demand a mortgage preapproval letter. It’s likely their real estate agent will insist on it.

The home sellers who get into trouble are usually those trying to ‘go it alone’ and do not have an expert on their side who can explain that the difference between a mortgage preapproval vs. a mortgage prequalification is huge!

Mortgage Preapproval Defined

A mortgage preapproval is a written commitment issued by a lender following a comprehensive analysis of a potential borrower’s overall creditworthiness. A mortgage preapproval includes factors like income verification, employment verification, proof of available financial resources, and the evaluation of other areas of credit.

Mortgage preapproval status for a loan is usually conditional upon the following:

  • A suitable property. The identification by the buyers of a suitable property they wish to purchase.

  • Continued creditworthiness. Continued creditworthiness means there is no material change in the applicant’s creditworthiness or overall financial condition before closing the sale.

  • Additional terms. Other limitations may or may not be related to the solvency and financial health of the applicant. These added items are ordinarily attached to the traditional mortgage application by the lender.

A mortgage preapproval letter implies that a credit decision has been made that will more than likely favor the completion of a mortgage commitment letter at some point shortly. In effect, the mortgage loan has been submitted to underwriting.

A mortgage preapproval letter is not a guarantee you will get the loan you want. It is, however, as close as you can get. So it’s something that can inspire confidence in homesellers that, if they accept your offer, you will be able to seal the deal. This is always an advantage for homebuyers, no matter what the curren state of the real estate market.

A Mortgage Pre-Qualification Letter Defined

To prequalify for a home loan doesn’t mean much. The concept behind a mortgage prequalification is this: you are a buyer, and you’re looking for a home. You might not have sufficient funds to purchase a home for cash; however, this defines most home buyers.

As a result of these circumstances, your ability to buy a house depends on your ability to borrow money. Because of this, you’ll talk with potential lenders before shopping for homes to determine your mortgage 'buying power' and be able to consider different loan programs to decide which might be ideal for you.

A mortgage prequalification is an estimate of your borrowing power. In effect, it is a statement from the lender putting forth that based upon your current financial circumstances, i.e., income, debt, and credit levels, you will likely be qualified for a mortgage for a certain amount.

Receiving“ mortgage prequalification” can be accomplished relatively simply by just a phone call to the lender or even just a quick visit to their website. The lender may or may not run your credit report to confirm your finances’ details and get a clearer picture of the amount and terms you’ll qualify for.

Pre-qualification vs. Pre-approval: What’s the Difference?

In a nutshell, the difference between being preapproved vs. prequalified is as follows:

” Mortgage pre-qualification” is a determination about whether or not the prospective applicant will most likely qualify for a loan within the lender’s current programs and standards. It is also a decision about the possible amount of the loan for which the prospective applicant will qualify.

“ Mortgage pre-approval” is a much more formal process. With pre-approval, you’ll have completed an application with the lender, supplied them with income data, employment data, bank statements, etc. The bank has gathered information about your whole life as it pertains to a home purchase and will also run your full credit report; the lender will have to run the application through an automated underwriting process.

A mortgage preapproval is a far more complete and comprehensive process than what is utilized for mortgage prequalification status.

Some Lenders Use Mortgage Preapproval and Prequalification Interchangeably

One thing that can confuse many folks is that many lenders use the words preapproval and prequalification as if they mean the same thing, especially in their ads. Using the words prequalification and preapproval interchangeably can cause doubt for real estate agents and consumers alike.

Here is what’s vital to know: Accepting a mortgage prequalification from a lender may be perfectly acceptable, as long as they do the same things a lender calling it a mortgage preapproval would.

In other words, if a mortgage prequalification includes verifying the borrowers, income, employment, and credit score, then you should be all set.

A prequalification is often not worth the paper it is written on unless a borrower’s financial information is verified. Mortgage prequalification should always be verified by real estate agents representing home sellers.

Likewise, an exceptional buyer’s agent should check their client’s prequalification letter before moving forward. As buyer's agents, we want to be able to show our clients homes that they can realistically afford, as well as homes they love!

The Mortgage Pre-Approval Advantage

A mortgage preapproval means that you are far closer to receiving a mortgage loan commitment from a lender than with just a pre-qualification. A preapproval can help buyers to take some of the guesswork out of the home buying process.

In the eyes of any seller – and their real estate agent, you are considered a “stronger prospect” with mortgage preapproval status than with just a pre-qualification letter.

A mortgage preapproval is beneficial as a bargaining tool in negotiating a better deal with a seller. Overall, having a pre-approval can make you feel more comfortable with the home buying process and have more of a leg to stand on when negotiating with sellers.

It should be noted that any outstanding Real Estate agent will require a buyer to have a pre-approval letter and NOT just a mortgage prequalification when they are representing a seller.

It would help if you understood that neither a pre-qualification letter nor mortgage preapproval is viewed as absolute, iron-clad loan commitments from lenders.

A creditor will still have to look closer to assess home appraisals, verify the information collected, and in some cases, re-check the applicant’s credit report again before agreeing to issue a loan. However, having a mortgage preapproval in hand is about as close as you can get to proving you’ll get the financing.

When a buyer is mortgage preapproved, they will typically get financing unless one of the following takes place:

  • The buyer loses their job before closing.

  • A buyer has misrepresented something in their mortgage application.

  • The buyer has not disclosed something to the lender like an impending divorce.

  • The home does not appraise for the value needed to get financing.

As you can now see, preapproved vs. prequalified are monumentally different.

So Why Seek Mortgage Preapproval?

You might be wondering, if neither mortgage pre-qualification nor pre-approval is a full loan verification and commitment from a lender, why should buyers even bother?

The answers are tied to the fact that buyers can get a more informed idea about how much they can honestly afford to spend on a home by taking the time to speak with a lender. They’ll have a better sense of which loan programs are best for them and their homes in their price range.

Buyers will also learn how much of a down payment is required up front to secure their loan. Receiving pre-approval is a significant step in the real estate buying process, and doing so can help demonstrate to sellers that you are a motivated and serious buyer.

Another crucial consideration is when the lender runs your credit; there is a possibility there could be errors on your credit report that could potentially derail your ability to get the best loan terms or even a mortgage altogether.

If this happens to be the case, you will at least be able to try to fix your credit report errors. Occasionally we have seen these kinds of credit issues surface. It is not a position that you want to be in when buying a home. For more on how to fix these errors, and how to improve your credit in general, check out our special white paper on the subject here.

If you’re in search of that dream Waterloo Region home, contact Team Pinto. Let us use our huge local real estate experience and expertise to help you. Contact us directly to discuss your unique Waterloo Region real estate needs at a time that's most convenient for you.


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