Pre-Qualification vs. Pre-Approval: What’s the Difference?

Pre-Qualification vs. Pre-Approval: Understanding the Crucial Difference

Transcript 

Ryan Hillard: Hi, this is Ryan Hiller with the Ford Mortgage Group, and today I want to talk about the difference between a prequalification and a preapproval and why they’re important. What often happens is that these two terms are used very interchangeably, and it depends on who you’re talking to. Someone can mean the same thing by them, but it’s important to create a distinction. When someone begins the process, they’re going to reach out, and they’re going to say, “Our agent told us that we need to talk to you in order to get pre-qualified or pre-approved.” 

Pre-Qualification

When you fill out an application, either online or in person, and pull your credit.

Ryan Hillard: What happens is that if we’re pre-qualifying someone, then what they are doing is they’re filling out the application, which you can do online, and we’re pulling their credit. That’s it. We’re not going the extra step further to look at any documents or verify anything, and we’re kind of taking their word for it to say, okay, this is what it looks like right now. Everything based on the information that you’ve given us in the application as you presented it looks good.

Pre-Qualifications are a good start but is not what you need for a smooth transaction.

Ryan Hillard: While that’s a good place to begin, it’s not the place that we need to be, especially in a very competitive market, in order to ensure a smooth transaction, which is always going to be our goal. 

Pre-Approval

After submitting an application, we will send a request for a list of documents needed to verify the information on the application.

Ryan Hillard: To get pre-approved, after we have the application, we’re going to then send a request for the documents to say, these are the items that you need so we can collect those, we can go through them, and we can confirm and validate the information that is in the loan application. An example of the difference may be something like someone said they had a certain amount in their bank account, and then we look at the bank account, and it either has more or less money.

Ryan Hillard: Obviously, we need enough to cover the down payment and closing costs, so that’s what we’re looking for. The bigger issue typically comes when we’re looking at income because examples of where this may get misconstrued and unintentionally, with no ill intent, but the difference would be where if someone puts in their net income, for example, and what I mean by that is they’re putting in their income after taxes and deductions and what we do is look at their gross income, so, before those items, if they are a W2 employee, for example. Other or bigger examples come when someone is self-employed, and we need to go through and look at tax returns in different documents for ad backs or deductions. 

If someone puts in their NET income (after taxes) on the application, we would make sure to look at their gross income.

Ryan Hillard: Also, when there’s variable income, things like commissions, bonuses, overtime, so on and so forth, if the employee has not been receiving these items long enough or this type of income long enough, then we may not be able to use it, and it could not be eligible income. It’s important for us as a loan officer to take a look at it, understand the guidelines, go through, make any corrections that may need to be made in order to verify and validate the income. Now, if there is a trickier income situation, we do have the ability to do a full TBD underwrite and send this off to an underwriter, who can further confirm the income just to make sure that everybody is on the same page. 

If the employee has not been receiving variable income (commission, bonuses, overtime, etc.) for a long period of time, it may not be used as eligible income.

Ryan Hillard: Our goal in doing this is always going to be to ensure a smooth transaction and that there are no hiccups or any issues with the underwriting process once we’re under contract. In order to get under contract, what happens is that when we present the offer, I’m going to pick up the phone, and I’m going to call the listing agent, and I’m going to have a conversation with them about the application and the client. I’m not giving away any confidential information, so there’s no concern about that, but what I’m saying is that we’ve looked at their income, we have the documents, so on and so forth. We’ve been able to confirm everything that is in there because what they want to know is that there aren’t going to be any issues with the underwriting process of this file once we are under contract. They know that everyone is going to be able to deliver as expected, and we’re going to be able to go through, have a great process, have a smooth transaction, and everybody will be happy at the end of the day.

I hope that’s helpful, but if you have any other questions, please feel free to reach out to me at 720-201-7261. You can email me at ryan@fwdmortgagegroup.com. Or you can go to my website at www.forwardmortgagegroup.com and get all of my contact information there. Have a great day.