Michael Shotnik
Branch Manager
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FROM OUR BLOG
May 15, 2018

PreApproved vs PreQualifed

We’ve all gotten that junk mail: You’re PreQualified! When you’re 18, it seems exciting to receive mail like that. You’re finally an adult and you have zero credit, so to be PreQualifed for ANYTHING is exciting. What you don’t realize, at the time, is that it’s for a credit card that has 110% interest rate. As an adult, though, the thought of being PreQualified isn’t quite as exciting. On the other hand, being PreApproved for a mortgage loan prior to house hunting…now THAT is something to jump up and down about! Let’s talk about the difference between being PreQualifed vs PreApproved for a mortgage loan.

PreQualified

To get prequalifed for a mortgage loan, you’ll submit personal information such as social security number, income, birth date, assets, etc to the lender so they can run your credit. After submitting this information, the lender may run your loan application through an automated underwriting system (AUS). Next, the the AUS system will figure out if you’re approved for the price point you’re looking at. Additionally, it will inform the lender of which additional documents will be needed in order to get preapproved. Lastly, your lender will give you a lender letter, which states that you’re approved to purchase at a certain price.

In order to get preapproved for a mortgage, you will submit the same personal information that you do for prequalification. Additionally, you’ll need the documents that support that information. For example, you will need pay stubs, W2s, bank statements, and possibly statements from any assets you may have. Similar to the prequalification process, you will receive a lender letter once you are preapproved.

PreQualifed vs PreApproved

So what’s the difference? They seem pretty similar except for the supportive documents that are required to be preapproved. Speaking of, you might be wondering why you would need to provide financial documents prior to finding a house. Let me explain by using some hypothetical examples.

Scenario 1: PreQualified

You find a home and put in an offer. Hooray! Your offer was accepted and you’re now under contract. You provide additional financial documents to your lender and they submit your loan application to underwriting for approval. During this process you’ve paid for the inspection, appraisal, radon test, etc. You’ve now invested $1500-$2000 for this home, all of which is non-refundable.

You hear from your lender that the paystubs and income you reported included a bonus, which doesn’t qualify because you haven’t had a history of receiving a bonus. Now, your qualifying income is reduced and your debt-to-income(DTI) ratio is too high. You can bring your DTI down by paying off one of your credit cards, but you’ve already allocated that money toward the down payment. However, if you don’t pay off your credit card and bring your DTI down, you no longer qualify for the loan.

This scenario is just one example of something that could happen during the purchase process with a prequalification. In some cases, a problem like this can be resolved. However, if it cannot be resolved, then the money that was invested in the inspection, appraisal, radon test, etc, will be lost.

Scenario 2: PreApproved

You submit your information to your lender before you begin the house hunting process because you want to be READY TO GO once you find the house! And in this market, there’s no time to waste! Your lender submits your application to underwriting for approval. Maybe you need to submit some more supporting documents, but it’s okay because you haven’t even found your house yet. Documents get submitted and you find your next house! Even better, your offer gets accepted!! *high five* You pay your out of pocket expenses such as the inspection, appraisal, radon test, etc. Lastly, your loan is approved!

Conclusion

In summary, the prequalification is just not a safe bet. No one wants to find out after they’re already into the process of buying a home and have already paid money that is non-refundable that there’s a problem. Listing agents are becoming more aware of the difference between prequalifications and preapprovals and are opting for offers with preapprovals over prequalifications. Understandably, they’re going to go with the offer that they know will close.

Still have questions on this whole process? Give us a call today, we’re happy to go walk through it all with you.

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Sierra Pacific Mortgage Company, Inc.

Sierra Pacific Mortgage NMLS# 1788. Michael Shotnik NMLS: 218281, CO License: 100017466. Regulated in Colorado by the Division of Real Estate #988320. To check license status of mortgage loan originator, visit D.O.R.A. and NMLS consumer access.