Mortgage Pre-Qualification vs. Pre-Approval

photo by Steve Spinks

Realtor.com quoted me in Mortgage Pre-Qualification vs. Pre-Approval: What’s the Difference? It opens,

When buying a home, cash is king, but most folks don’t have hundreds of thousands of dollars lying in the bank. Of course, that’s why obtaining a mortgage is such a crucial part of the process. And securing mortgage pre-qualification and pre-approval are important steps, assuring lenders that you’ll be able to afford payments.
However, pre-qualification and pre-approval are vastly different. How different? Some mortgage professionals believe one is virtually useless.

“I tell most people they can take that pre-qualification letter and throw it in the trash,” says Patty Arvielo, a mortgage banker and president and founder of New American Funding, in Tustin, CA. “It doesn’t mean much.”

What is mortgage pre-qualification?

Pre-qualification means that a lender has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a certain amount.

But here’s the rub: Most often, the pre-qualification letter is an approximation—not a promise—based solely on the information you give the lender and its evaluation of your financial prospects.

“The analysis is based on the information that you have provided,” says David Reiss, a professor at the Brooklyn Law School and a real estate law expert. “It may not take into account your current credit report, and it does not look past the statements you have made about your income, assets, and liabilities.”

A pre-qualification is merely a financial snapshot that gives you an idea of the mortgage you might qualify for.

“It can be helpful if you are completely unaware what your current financial position will support regarding a mortgage amount,” says Kyle Winkfield, managing partner of O’Dell, Winkfield, Roseman, and Shipp, in Washington, DC. “It certainly helps if you are just beginning the process of looking to buy a house.”

Tuesday’s Regulatory & Legislative Round-Up

  • The Federal Housing Finance Agency (FHFA) is seeking public comment on its revised system of records for the National Mortgage Database Project. The FHFA collects information on all outstanding U.S. mortgages in keeping with its mandate to ensure the creditworthiness of borrowers. Mortgages remain in the NMDB until they terminate through prepayment (including refinancing), foreclosure or maturity. Information from credit repository files on each borrower associated with the mortgages in the NMDB will be collected from one year prior to origination to one year after termination of the mortgage.