A Pre-Qualification Could Lose The Deal
by Michael Eastham, CPA, CRMS

In the world of real estate transactions, people use the words “pre-qualification” and “pre-approval” interchangeably. The problem is they mean two totally different things. If you use the wrong word, you may find yourself in the throes of a very sticky situation.

Pre-qualified-means that you have had a conversation with a lender and based on the information you gave, the lender “believes” that you will get the loan. This is a very simple thing to do. In a brief conversation, I can determine whether or not the factors necessary to qualify exist or not. 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 something could shoot down the loan and it could be declined.

If you are serious about buying a home, it is critical that you receive a full-blown pre-approval. If not, you run the risk of wasting not only your time, but your realtor’s time, the seller’s time, and the listing realtor’s time too.

Pre-approved-the lender has not only reviewed your loan information as in the pre-qualification stage, but has also taken that loan through several other steps to insure loan commitment.

Verify documentation-all of the documentation to support the loan request is 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 can issue the “pre-approval” letter that states the loan is approved, based on the verified credit worthiness of the borrower.

Pre-approval equals Cash Buyer-This is a significant point, because when buyers have been pre-approved, they are effectively a cash buyer and are in a much better negotiating position, 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 “pre-approval” 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.”

Michael Eastham is CEO of Global Lending Group, a mortgage lender in Altamonte Springs, FL. He is the host of the radio show “Your Home, Your Money”, which can be heard Saturdays at 1pm and Mondays at 4:30pm on AM 950 WTLN. Michael can be reached by phone at 407.388.1036 or by email at meastham@glgi.net.