Pre qualification letter

16 Replies

Please explain the pre qualification process on a loan. I currently filled out a questionnaire from a broker but now he is asking to completea , “document checklist with a list of documents needed for your loan qualification once you find a house. “ can I submit that even though I have not started looking? I thought that was purpose of a pre qualification letter; to Show an agent proof that you qualify. Please clarify. Many thanks.

A pre-qualification and pre-approval are not the same thing. With pre-qualification, you’ll supply an overview of your financial history to the lender, including income, assets, debts, and probably your credit score. The lender will review this information and give you a rough estimate of what you would qualify for. 

Mortgage pre-qualification doesn’t always require documentation of your financial background as it can often be self-reported. 

Mortgage pre-approval is very similar, but it usually requires documentation and verification of your income, assets, and debts. Preapprovals require a credit check and prequals usually do not.

If you want proof that you qualify for a loan amount, get a preapproval.

Originally posted by @Juan Alvarez :
@Wayne Brooks but why did he ask me to Provide that information once I find a home? I thought the purpose was to have the pre approval so you can start house hunting??

 Some lenders only offer prequals. 

The problem with this is that prequals are useful primarily as toilet paper, since they are based on stated credit stated income stated assets, etc, and the year isn't 2006 any more.

If a lender isn't willing to do a full doc preapproval, I'd put them in the "refinance only" bucket. 

@Juan Alvarez

Agents want to see pre-approvals. This means you have been underwritten and submitted documents backing everything you have claimed on the application and shows you can actually afford a property of a certain price and that the lender that generated the pre-approval is willing to lend you that amount of money that is stated on the preapproval.

This is serious business. Most realtors will only consider a pre-approval letter from well established banks (e.g. JP, BoA, Citi, Wells Fargo etc) before forwarding all offers to sellers to consider.  This does not mean you can not use other lender later. My preference is local brokers with a good reputation or major lenders. 

@Juan Alvarez Realtors and the sellers they represent want to see a pre-approval letter for an approved loan amount based on credit score and income verification.  This assures the agent and seller you have the ability to secure financing whereas a pre-qualifying letter "qualifies" you if you have employment and a stated credit score. Granted, I'm not a loan agent but have gone through the process several times for refinancing or financing a property to know what you should have ready for your agent and their loan officer:

- credit report (Experian, TransUnion, Equifax); banks will usually run their own, so Credit Karma does not count. You can get a free copy from all three bureaus at annualcreditreport.org  If you have a security freeze on your credit report (now free to everyone), you'll want to lift it temporarily prior to having your lender run it.

- income verification: Two most recent months of paystubs if you have W-2 employment or 2 years most recent tax records if you own your own business. You'll also want to have the two most recent bank statements of all accounts. Providing a summary of amounts in retirement accounts, 401 K s can show you have resources to draw on in addition to employment income. If you own rentals, you'll want to provide copies of leases, tenant ledger if you are using rental income to qualify for the loan. You may also have to meet an experience requirement managing your rental to qualify for certain loans.

Assembling these items in an easy to read financial portfolio for your lender can make a good impression and help keep you organized 

I hope this information was useful and good luck on getting your loan! 

Adding to replies above. I was a mortgage loan officer at Chase Bank, and am currently a real estate agent. 

A prequalification letter merely states your lender checked your credit, which qualifies for the loan type and amount by weighing your income versus your monthly debts that appear on your credit report. You’ve stated your income, but haven’t let underwriting validate if they can use that income.  

A Preapproval letter means you and your lender took additional steps towards approval of the loan by you submitting documents to underwriting for income (pay stubs and/or 2 years tax returns if self-employed, child support, etc.), assets (bank statements, retirement statements, etc.) , and even promissory notes or statements of monthly debts (car loans, etc.)

Your loan in the preapproval stage is conditionally approved, except for the property.

So you then need to find a home, and the lender will submit additional documents on the property (appraisal, survey, title search, etc.) before final approval to close. At this point you’ve already written an offer that was accepted by the seller  

Preapproval letters hold more weight when making an offer than prequalification letters.

Hope this helps!

@Juan Alvarez When I'm representing a seller and am presented with an offer, I vet the lender.

I call the loan officer directly and ask "have you reviewed pay stubs, W2s, tax returns and bank statements?"

If the answer is no or not yet, I advise my seller that we don't really have any idea of whether this person can buy your home or not - and I advise against taking it off the market until we have a proper pre-approval.

I recently had a buyer client with a Quicken Loans "pre-qualification" for $380K.  The lender assured me it was good, but on further review (above docs were received and reviewed), $380K dropped to "the low $200K range."

As a seller's agent, I cannot be too careful with these things.  If I accept an offer with a bad pre-approval, I'll end up having to go back on market when the deal eventually blows up - but this time, the listing is stigmatized.

When I list a home I want to see a preapproval from a reputable lender. I want to see proof of funds for the down payment. I call the lender and confirm they have run rhe credit and verified assets, and they usually tell me what that credit score and assets are. If they are marginal, that is taken into account when reviewing the offer. Also the reputation of the lender and the buyers agent also weigh on the offer.

Get a full pre-approval letter, not a pre-qual letter. Many lenders don't want to go through the process for a pre-approval because it takes up their time...but many sellers like me will only consider offers from buyers with a pre-approval letter that states the buyer has had their income, assets and credit history reviewed. Otherwise, a seller is essentially removing their home from the market for that buyer in order to later determine if the buyer actually has the ability to buy. Tell the lender what you want and if he can't accommodate, find another lender. 

@Sara Burwell thank you for that information. I have a question, what if I’m approved up to $150k at this moment but let’s say i don’t find the right property until three months from now, but the asking price is $200k. Are they able to re run those numbers since I have saved more money etc??

Juan,

Your original Preapproval of $150k will be valid for typically up to 90 days. If you find a property after that timeframe, you’ll need a new Preapproval letter (your credit is pulled again), and there is a possibility your overall loan amount can increase. The main factors that affect how much you can borrow are income and monthly debts:

 Increasing your income (don’t we all wish it were that easy), or reducing your monthly debts (pay off credit cards and loans that appear on your credit report)

Also, you may save up more cash in the 90 days, so you can submit a larger down payment. 

Lenders are well versed on the many variables, so your best bet is to take the time to have your lender run through all the scenarios with you, so you have confidence and numbers to back your offer. Communication is key in this game!

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