One of the most common questions I get these days is:

"What is the difference between a pre-qualification and a pre-approval?"

Although the words may sound very similar, there is a huge difference. Savvy Realtors and mortgage professionals know how to use a pre-approval for the buyer's advantage.

Here is the difference...
A mortgage Pre-Qualification is a qualification based on what a buyer verbally tells a loan officer. This typically happens over the phone or on a secure loan application. Credit is usually pulled for a pre-qualification as well.

A mortgage Pre-Approval means that a licensed mortgage professional has personally reviewed your income/asset docs, credit, job history, and residence history for the past two years. When I issue a pre-approval letter I am saying "I have personally evaluated my client's financial picture and we are ready to buy when you find the right home.

Here is a good scenario to show the difference:
I work for Exxon and make $100,000 a year. My wife and I have $30,000 in the bank and we have two credit cards we pay off monthly. Credit is pulled and we have a 775 score which is great. A pre-qualification letter is issued so that you can go shopping quickly. On the surface this looks like a very easy loan and all the above information is true.

This scenario could change drastically when the mortgage professional has a chance to review the documents that support this information. Let's say that the $100,000 a year is made up of a small base salary and a bonus plan that just started this year. Also the $30,000 "in the bank" is a teacher's retirement account that cannot be touched for the next five years. These two factors can change the amount you qualify for drastically.

Why is all this important to you?

1.) Better Negotiation Position- Savvy Realtors and sellers know the difference! If two offers come in and one has a pre-qualification letter while another offer has a strong pre-approval letter from a local reputable lender... the pre-approval letter will trump the pre-qualification letter, sometimes even if the offer is a little less. In our office we love to let the sellers know that our buyers have done their homework upfront and we have a really strong loan.

2.) Clear Plan of Action- You will have a very clear understanding of the direction you are going with your financing. A good mortgage professional will meet you in person for a consultation, listen to your situation, and evaluate your financing options and put together a plan of action to get you into your new home. Just because you qualify for a $500,000 home doesn't mean that is the best loan for your situation.

3.) Less Stress & Quick Close- By going through a pre-approval upfront you are getting the majority of the loan process out of the way. Since we have gathered most of your documents upfront and have a mortgage plan of action, your mortgage lender has the ability to close quicker and reduce your stress when relocating your family. There is a lot involved in a move: packing, switching utilities, enrolling kids into school, changing your address, working full-time... It is much easier to update a couple of pay-stubs and bank statements when the time comes than searching for documents while you're going through major life changing events like buying a home.

The sad thing I see in our mortgage industry is that many loan originators do not clarify the difference between the two terms. They stop at the pre-qualification stage and wait until you get a sales contract... maybe it is laziness lack of experience, or just too busy but it has put many buyers and sellers in very sticky situations. By not having a mortgage pre-approval, all parties can be in jeopardy of losing money, missing closing dates, wasting time looking at homes in the wrong price range and extreme stress throughout the moving process. When buying a home make sure that you put yourself in the best position you can by getting a "True Pre-Approval".