Pre-Approval Versus Pre-Qualification: What’s the Difference?

A pre-qualification is when a mortgage loan originator will go over the basics of the mortgage loan borrower’s income, monthly debts, liabilities, assets, credit report, credit history, and credit scores.  Pre-qualification letters are often worthless because they are not verified information by the mortgage lender.  Someone can get a pre-qualification letter after a verbal one on one consultation with a licensed mortgage loan originator.  The loan officer will just go off the information given to him by the borrower without actually seeing the borrower’s tax returns, W-2s, and bank statements.   A mortgage loan borrower can make $40.00 per hour full time and have sufficient income but write off the majority of his income on his tax returns where it makes him not qualified for a residential mortgage loan.

What Is A Pre-Qualification

A pre-qualification is to see whether the mortgage loan borrower can proceed further to the pre-approval stage.  A pre-qualification will determine what mortgage loan program you qualify for:  Conventional or FHA?  A pre-qualification will determine what the maximum loan amount you will qualify for and how much house you can afford?  A pre-qualification will determine whether you need a non-occupied co-borrower?   A pre-qualification will determine how much down payment you will need and how much your closing costs will be.  Once you are pre-qualified and are ready to purchase a home, you can then move up to the pre-approval process which does not take too much time.

Pre-Approval Versus Pre-Qualification: Pre-Approval Letter

A mortgage loan originator will issue a mortgage loan borrower a pre-approval letter once the borrower has completed a 4 page 1003 mortgage loan application and has authorized the loan officer to run a tri-merger credit report.  The mortgage loan originator will then verbally verify income, assets, debts, liability and credit information to make sure whatever the borrower listed is correct.  The mortgage loan originator will most likely ask for two years tax returns, W-2s, and most recent paycheck stubs to confirm income information.   Providing tax returns is very important because even though the mortgage loan borrower is a W-2 wage earner, the loan officer needs to see what types of writeoffs the borrower wrote off on his or her tax returns.  If the borrower wrote off too much, that needs to be deducted from the monthly gross income they have stated on the 1003.  A big write off on tax returns can really affect the borrower’s back end debt to income ratios and could affect the outcome of the mortgage underwriter’s decision.

Automated Underwriting System

Once the loan officer has analyzed and reviewed the borrower’s overall financial and credit profile, he or she will then submit the borrower’s mortgage application to Fannie Mae’s Automated Underwriting System for a DU FINDING.  If everything works out, the borrower will ge an approve eligible per DU FINDINGS.  A pre-approval is then issued and the borrower can take the pre-approval and start shopping for a home and can enter into a real estate purchase contract.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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