What do pre-qualification and pre-approval letters accomplish and what is the difference between them?

A pre-qualification letter is from a lender who has done a quick review of your financial situation and based on the results believes, if additional information is provided you will qualify for a loan. In other words the lender is simply stating that there has been no negative information uncovered preventing you from getting a loan.

A pre-approval letter indicates a thorough analysis of your credit, income, and assets has been completed and you are pre-approved by a lender for a specific loan amount.

As you would imagine, a pre-qualification letter is easier and quicker to obtain than getting pre-approved but it is often the first step in the approval process. A pre-qualification letter can be issued while information and documentation is being submitted and verified for the pre-approval letter.

A pre-qualification letter is normally issued by a loan officer after an initial interview, credit check and determining a loan amount. Loan officers and mortgage brokers do not make final loan approval decisions, so a pre-qualification letter is not a commitment to make a loan. Since no verification of information has been completed, the pre-qualification letter is an opinion and the lender is not bound to make a loan when you are ready to buy. There is no guarantee you will actually qualify for the loan amount for which you have been pre-qualified. The letter is used when you are making an offer on a home and indicates to the seller you are qualified to purchase the property based on the information you provided the lender and subject to verification.

Pre-approval is a formal process based on documented and verified information. It involves your assets, liabilities, down payment employment history, and credit score. Your application is sent to an underwriter and a decision is made regarding your loan. If your loan is pre-approved, you are provided with a pre-approval letter or certificate. Having a pre-approval allows you to close or get a final loan commitment quickly when you find the right property. In addition, a pre-approval for a loan gives strength to your offer and in some cases may improve your negotiating power, since being pre-approved is closer to having cash to pay for the property.

If the loan approval letter is better why pre-qualify? Because sooner or later you will have to make a formal application and getting pre-qualified is the first step in the process. It also speeds up the loan process and can save you time and headaches by only looking at homes you are estimated to be able to afford while you seek pre-approval.

Although not a requirement, a pre-approval from your lender demonstrates you have good credit history and are qualified for a mortgage loan of a specified size. In today