Pre-Qualified, Pre-Approved, and Approved  are terms you will likely hear while seeking and securing financing for your new home.  Although these terms are similar in meaning, the commitment level behind the meaning of each is very different.  In essence they indicate the stage a borrower’s loan is to being “Cleared For Closing”.   Unfortunately many realtors don’t know the differences and many loan officers don’t take the time to explain them.   A misunderstanding can lead to disappointment, closing day stress, confusion, and unexpected delays to closing.

Pre-Qualified:

"Pre-qualify" means that you have given information about your income and outstanding obligations to a loan officer, who will estimate your borrowing power based on the data you supplied.  In most instances the loan officer will also obtain a credit report from at least 1 of 3 repositories to determine your credit score, and gain a level of comfort that the information you have given is accurate.  Based on this information alone, with NO actual verifications completed, your loan officer will be able tell you what home price range you most likely “QUALIFY”  to comfortably afford.  They should also be able to identify any obvious credit issues that you may need to address prior to closing.  You have now been “Pre-Qualified” for a loan.

Pre-Approved:

"Pre-approval" means that the loan officer has now accessed your credit information from all 3 national credit repositories, identified a specific loan type and term, and has communicated electronically, the information you have provided to the lender.  Based on the ability to verify those specifics, AND any new documents requested by the lender, you have been “Pre- approved” for a loan.  Differences to information input and what is actually verified may change the terms of your pre approval, requiring additional documentation, or if there are large discrepancies, even terminate a pre-approved status. 
An Important tip:  Be as accurate as possible when verbally supplying income, employment, and credit information to your loan officer.  However, once you have received a pre approval status, NEVER give the lender any documentation they have not specifically ask for.  This may only raise unnecessary additional questions and lead to the need for even more documents.

Approval:

Once you have a pre-approved status you will be given a list of any other documents needed.  When all documentation requested has been supplied to your loan officer, it is reviewed, placed in the required order, and only then delivered to an underwriter.  The underwriter will again verify that all documentation requested in the pre approval is accounted for, authentic, and meets the specific requirements of the lender.

At this stage the underwriter is not only verifying your documentation and ratios, but also specifics related to the appraisal, comparable properties, title, Title Insurance, purchase contract, property taxes, home owners insurance, certificate of occupancy…etc…   Finally, with all things verified, your loan is now “Approved”.

Cleared for Closing: 

Generally once approved you can relax, but technically there is still a chance things can go amiss. When a loan clears Underwriting it then moves into the closing department where a final verbal verification of employment must occur before the lender can generate the closing documentation.  The closer may speak with a coworker, but the phone number called must be traceable to the employer’s offices and not an individual cell phone or private residence.  All done, your loan is now Cleared for closing and closing documents delivered.

A Prequalification Letter is an expressed opinion that you will likely be approved for a mortgage.  Not very reassuring to anyone. 

A "Pre-Approval" Letter is a stronger indication to a home seller that you are financially qualified to receive a mortgage if they accept your offer to purchase.  Since a sellers doesn't want to accept an offer and worry the buyer will not be able to complete the purchase, a "pre-approval" letter give the buyer a stronger negotiating position.  Statistics indicate, you may save as much as ten percent on the sales price of the home, when a pre-approval letter accompanies your offer on a home.

Janice Fowler
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