Prequalification v. Preapproval: What's The Difference?

Guest Contribution from Michael Eastham, CPA
Certified Residential Mortgage Specialist &
Chief Executive Officer - Global Lending Group
Phone: 407-388-1036 (ext. 140) / meastham@glgi.net
140 N. Westmonte Dr #204 - Altamonte Springs, FL 32714

In the world of real estate transactions, professionals and purchasers sometimes use the words “prequalification” and “preapproval” interchangeably. The problem is they mean two totally different things. If you are using the wrong word in place of the correct word, you may find yourself in the throes of a very sticky situation.

Let me paint the picture for you: you are the potential buyer of a home, ready to make an offer on a house. Your realtor tells you that you need to get a “pre-qual” letter from your lender to submit with the contract. You receive the letter and give it to your realtor. The letter is then submitted with the contract and accepted by the seller. Great news! Or is it? The contract states that you must close within 30 days and you could not be more excited. Now, let’s fast-forward to day 28. Your lender calls you to let you know that your loan was declined.

How could something like that happen, you ask? You were pre-qualified! Well, this is one of those times when you must understand what the definition of “is” is. There are significant differences between being prequalified and being preapproved. Knowing what they are beforehand can determine whether you actually close on the transaction or not.

Having a pre-qualification simply means that you have had a conversation with a lender and based on the information you have submitted, (and assuming all of it is true and that you can document it) the lender believes that you will get the loan. This is a very simple thing to do. In a 10-minute conversation, I can determine a borrower’s debt-to-income ratio, credit score, amount of available assets, and what loan to value is needed for the borrower. However, one thing that is not included in this process is the documentation needed to support the loan request. Without this information, the lender runs the risk that any one of a hundred variables could shoot down the loan and it could be declined.

When you get preapproved, it means that your lender has not only reviewed your loan information as in the prequalification stage, but has also taken that loan through several other steps to insure loan commitment. All of the pertinent documentation to support the loan request has been collected and reviewed by the lender. This is called the credit underwriting stage, and it is critical to make sure that the borrower is credit approved. W-2’s, pay stubs and tax returns are reviewed in order to verify income. Employment is verified. Funds necessary for closing and post closing reserves are sourced using bank statements, investment statements, and retirement assets. The credit report is carefully reviewed and prior mortgage history is verified. All compensating factors are considered as the underwriter assures the lender that the documentation supports the loan request in accordance with the guidelines for the requested loan program.

Once the credit underwriting is completed, we are able to issue the “preapproval” letter that states the loan is approved, based on the credit worthiness of the borrower. The only unknown factors are those relating to the property. That is why this credit approval will always be subject to the borrower providing a fully executed contract and a satisfactory appraisal for the subject property. This is a significant point, because when buyers have been preapproved, they are for all intents and purposes, the equivalent of a cash buyer. They are typically in a much better negotiating position, and are much more likely to have their contract accepted by the seller.

If you are serious about getting the house you want, you must understand the difference between these two terms. It is important to have that “preapproval” when you submit the contract. That way you can submit your offer with confidence, knowing that the loan is ready to go as soon as you get the contract and the appraisal. Of course this takes a little more time, but that is where a little planning comes in. If you get started just a few weeks before you plan to go house hunting, I guarantee it will save an enormous amount of time, pressure, and anxiety on everybody’s part when you do find that “home of your dreams.”

First Time Home Buyers Need a Reputable Mortgage Officer

After reading a post from my Guest Contributor Jorge Merlos, I had an epiphany. I hadn’t given you a real life example of a reputable loan officer in the Columbia area. Hence….this post is dedicated to correcting my faux pas.

There is a lady that is unique in several ways and brings her artistic creativity to the world of mortgage lending.

Let me introduce you to Leah Avery with Bank of America. She can be reached at (803) 255-7759 or you can email her at LEAH.AVERY@BANKOFAMERICA.COM


Patterson Group has teamed with Leah and her fellow loan officers to market a full range of banking products and real estate services to Columbia, South Carolina real estate home buyers.

Leah is a Columbia native and a Graduate of The University of South Carolina. Yes…Clemson Fans. Leah will still get you a great mortgage for your home.

Leah will meet to discuss your financial needs and analyze your credit and financial information in preparation to obtain the best mortgage option for your purchase while minimizing closing costs.

Leah sends this list of items to post. These are some items needed to assist her efforts to help you.



*2 years W-2s...Most loan programs will require that the borrower provide only the previous year’s W-2 statement. However, some government programs will want to review two years. If you are self employed, you’ll need to bring your entire return for the previous 2 years.

*Bank Statements...Lenders require a 60 day history of all active bank accounts. It is with these documents that funds to close are verified, etc.

*Current pay stub...Pay stub(s) will assist the lender in verifying monthly gross income, as well as what the borrower has earned year to date. Most loan programs will require only one pay stub, while several government programs request pay stubs for the previous 30 days.

*Driver’s License...Your lender will verify your name, address, etc. with your driver’s license. Please be sure to take your license to closing as the attorney may also verify your information.

*Other Income...If your qualification is based on other forms of income including child support payments, bring documentation (cancelled checks, etc.) to prove verification of such income.

The process of applying for a mortgage can be the source of much anxiety.

If you plan to meet with any lender in the near future, these aforementioned documents should be with you upon arriving at the lender’s office. This will contribute to expediting approval of your mortgage application.



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How to Determine Whether Your Loan Officer is Reputable

Guest Contribution from Jorge Merlos
Integrity Home Finance-Rancho Cucamonga, CA
Phone: 909.945.8621 / jmerlos@ihfinance.com



In slower markets, some loan officers may feel pressured to close deals that aren't in the homeowner's best interest. In order to avoid getting into difficult and financially compromised positions with their mortgages, borrowers are well advised to be acutely aware of the signs of a responsible loan officer when selecting a mortgage professional.



First, look for a Mortgage Planner whose values are focused on helping individuals to achieve their financial goals in both the fastest and the safest way possible. A reputable Mortgage Planner will show you the numbers associated with the proposed loan and provide you with concrete information that backs up his or her claims. Review all of the numbers. If they don't add up, ask for clarification. If your loan officer can't or won't answer your questions, move on--without the loan.


Secondly, a responsible Mortgage Planner will present you with financial information that goes beyond the point of the transaction, and will illustrate the total cost of the loan over time. If your loan officer is focusing only on rates and fees, you may be working with someone who's looking out for his or her own best interests, not yours.



Responsible Mortgage Planners will also tailor their strategies to fit your unique situation. In other words, they always take your personal financial goals into account. No one should try to place you into a loan without knowing the intricacies of your personal financial situation.


Finally, if your loan officer is advising you on issues other than mortgages, you could be working with someone who is compromising your best interests. Issues like investment rates of return and real estate appreciation aren't the areas of expertise for the vast majority of mortgage professionals and should be left to the professionals who have training and direct experience in those areas.


When seeking a loan officer, look for someone who specializes in mortgage planning, which is the process of evaluating a borrower's unique financial situation and advising the borrower on a loan that best suits his or her individual needs and goals. If your loan officer is trying to put you into a loan without evaluating how that loan will effect your entire financial situation--including debt management, tax benefits, investment goals and net worth--it's quite possible that you're only getting half of the picture.

The bottom line is that your mortgage representative should always be looking out for your best interests, regardless of market conditions.

David's Footnote: For more information on Columbia, South Carolina loan officers, CLICK HERE.

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