Easy Goes It
Contrast the Pre-Approval to a Pre-Qualification. A Pre-Qualification is fundamentally based on a verbal exchange of information related to a potential borrower’s income and assets. In some cases, the lender may attain permission to run a credit report and review. Some lenders may decide not to pull a credit report until the borrower is ready to commit to begin a mortgage application process. They will base Pre-Qualification on a credit score you represent. With most credit card companies now providing your credit score complimentary on a monthly basis, some borrower’s may be aware of a representative number of what the mortgage lender should expect.
One small note of caution; mortgage credit is based on the middle score of the 3 repositories and most credit card companies only supply one score from a single repository. Additionally, consumer credit scoring models may vary slightly from mortgage credit scoring models, so be aware should you experience different numbers coming from the same reporting organization or repository (TransUnion, Experian, or Equifax).
The amount of credit or number of active trade lines on your credit could be important as well. Most mortgage loans have criteria associated with having a certain number of active trade lines in order to support the credit score, even though repositories can generate credit scores with minimal trade line or credit activity.
“Pre-Approved” implies to realtors and sellers you have a commitment from the mortgage company to lend you the mortgage subject to a sales price, loan amount, maximum monthly payment, ratified purchase agreement, an acceptable property appraisal, and maybe a few other random conditions. The “Pre-Approval” letter should be specific about the conditions needed in order to complete the mortgage loan and will also indicate a expiration date of the pre-approval based on the age supporting documentation provided. And of course, as long as you keep the information up to date, and there are no changes in your financial circumstances, the Pre-Approval should be able to be continually extended.
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:
The purpose of this blog series is to help you know what the difference is, what you should be asking for based on your circumstances, and to help all parties realize a successful transaction. One of the reasons Listing Agents will review a Lender Letter with a fine tooth comb is because it is a critical component to a seller’s decision to accept a purchase agreement and, in essence, remove their home from the market while the borrower pursues the financing.
