What is the Difference between a Pre-Approval and a Pre-Qualification?
People have asked what the difference between a Pre- Approval or a Pre-Qualification. I know there has been a lot of chat in the rain about deals falling apart in underwriting etc...
Honestly a good pre-qual is as good as any pre approval, and better than a bad preapproval for sure! Here is my quick explanation of the two.. Which I have turned into THREE:
· Pre-approval: Should be a fully underwritten file subject to a house... (using hypothetical house info) in 99.44% of the cases it makes NO sense to do this. It should only be done for the more difficult deal that is "iffy" from the start. (I made up the 99.44%, that's Ivory soap! but it is close to being true! We know which deals are difficult up front and which ones we can do blind folded)
· Pre-Qualification: Is basically talking to some one like me, possibly looking at pay stubs or tax returns. (I usually have people read numbers off of stubs, 1040's and W2's to be sure the numbers are accurate, you would be surprised how often the initial response is off, on both directions) And of course full credit report. A good LO will give as good a prequal as Pre-approval.
Some people get the two confused... or just don't ask the right questions for either of the above... Same as in any business, "Garbage in = Garbage out" There was NO learning curve in the past 5 or 6 years... "just take the deal" was the mentality... I started in the business when we HAD to know how to read tax returns, we Had to know FHA and VA. In this decade Loan officers did not need to know, or were too lazy to know the 'right' way to put a deal together. A lot has changed in the past year or so. A lot of balls are being dropped due to a lack of knowledge in the industry today.
Deals should NEVER fall apart if buyers were screened properly... But Loan Officers have to keep up on their guidelines as much as Realtors have to keep up on Values. This has created one other important piece in today's environment:
· RE-Qualification... Guidelines have been changing frequently in the past year, some one that could qualify last month may not qualify today. One of the blogs I posted (links above) discuss this very topic.
Deals Don't just fall apart for no reason. Either there is inexperience involved... the wrong questions were asked. A loan officer has to ask probing questions. You cant just ask, "what is your income" You will NEVER get the right answer!
And as Agents, you can not trust a 'dated' pre-approval or pre-qualification. Especially if it is from someone you don't know. You need to double check these qualifications. Now, more than ever, you need to stick to your team to keep deals together. You need a trusted lending partner to keep your clients happy and the referrals flowing after the deal closes. We build each others reputation, and we need to work together as a team to keep OUR deals alive!