Tuesday, August 08, 2006

Pre-Qualification v. Pre-Approval

There is a difference between these two tools used by everyone in the home buying process, from Real Estate Brokers, Attorney, Coop Boards to Mortgage Brokers. The Pre-Qualification Letter is a letter that a Loan Officer will write based on what the buyer has described as their situation and the Loan Officer's understanding of the mortgage programs out there. It's not a rigorous process and I don't recommend them at all.

The way to go for everyone involved is a Pre-Approval Letter. This process is a process by which the Mortgage Broker (or Loan Officer) takes the entire application, getting all the information from the borrower, from present address and employment history to income and assets along with account numbers. A credit report is pulled on the borrowers, tradelines are matched up and verified with the borrower. Then the application is run through Fannie Mae or Freddie Mac's underwriting engine and it comes back "Approved".

After a Pre-Qualification Letter is given to the borrowr from the Loan Officer, all that needs to be done is for the borrower to provide the documentation reflecting the information on the application. The mortgage is essentially approved and pre-sold to the secondary market once it funds.

Yes, this process costs the Mortgage Broker or Loan Officer money, they must pay for the credit report and the Desktop Underwriting of the file at a minimum, but borrowers and Real Estate Brokers should insist on nothing less. A Pre-Qualification Letter means that the borrower and the Loan Officer had a conversation, nothing more really. A Pre-Qualification Letter means that subject to verification, the mortgage is approved and the purchase will happen.

My understanding is that the only valuable information a Mortgage Broker has for a Real Estate Broker is the closing date. A Pre-Qualification Letter can give the Real Estate Broker the information they need.

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