What's the difference between a pre-qual and pre-approval letter when buying a home?

Getting pre-qualified for a Home Loan is probably the most important step in the buying process when looking for a new home, whether it is in Palm Springs or anywhere else.  HOWEVER, being "Pre-qualified" is not the same as being "Pre-approved." 

Here's the difference:   Being pre-qualified is essentially a term that is used as click bait for lenders to get personal information for uneducated home buyers.   However, a Pre-approval letter is much stronger and carries a lot more weight when you're presenting your offer to purchase a home.  

What is the Difference Between Being Pre-Qualified Versus Pre-Approved for a Home Loan?

Being “Pre-Qualified for a Home Loan” is sort of your first step in the process.  However, it does not mean you are actually approved for a loan. 

What Does it Mean to Be Pre-Qualified for a Home Loan?

A Pre-Qualification is a lesser type of pre-approval letter. It can really mean a lot of things and the uncertainty makes sellers and their savvy agents, nervous. A "prequal" typically means  the buyer has made application for a loan loan.  In most cases the lender may have or may not have run your credit and asked for additional info, but it has not been verified.   Some lenders will issue this pre-qualification letter explaining they are considering giving the buyer a loan based on this unverified information. Even though they are issuing the pre-qual letter they are not sure at this time the buyer is really going to be approved. There will usually be a list of conditions required prior to getting a full "pre-approval."  

Most listing agents give little credit to a "pre-qual" letter.   Typically we see these pre-qualification letters from internet-based lenders or large national banks. 

Presenting an offer with only  a pre-qual letter, instead of the stronger  pre-approval letter, may make a seller nervous about accepting an offer.  Why?  A seller and their agent may feel as though the buyer has not really supplied proof that they actually qualify for the financing of a home.  If for some reason the lender decides not to approve the buyer, that buyer may cancel the contract. Now the seller has to put their property back for sale losing days on market. When a seller loses days on market it always costs them money in some form. It also weakens their negotiating position

What Does it Mean to Be Fully Underwritten Pre-Approved for a Home Loan?

A fully underwritten "pre-approval" letter is much stronger and more meaningful in the purchasing process.  This typically means the buyer has been fully approved for their loan amount;  they just need to locate a property that will appraise for the purchase price. In order to be fully approved a buyer has had all of their documentation submitted through automated underwriting. This means the lender has verified employment, assets, debt to credit ratio, credit scores, and funds to close. After verifying all of the documentation the lender is confident this buyer is worthy of the loan and will issue a fully underwritten pre-approval letter. Reputable lenders generally will run all of their applicants through full underwriting right away. Ask your agent for a recommendation for a good lender.

Its been our experience in the Palm Springs market, that you can rarely get an offer accepted without this type of fully underwritten pre-approval.  

Should you get pre-approved BEFORE you start shopping for a home? 

YES!  You should know how much home you can afford before you spend a lot of time looking for that perfect property.  Know what your payments and costs will be based on a specific price range;  only look at homes in the price range that you want to be in based on the payments.  The "Pre-approval" process doesn't happen overnight-  it can take days, if not weeks, for an underwriter to review all of your documentation.  When you're out looking for a home and you find the one you want to write on, you want to have your pre-approval letter in hand ready to accompany your offer. If you don't have it, and you're waiting for the pre-approval letter, you might lose out on getting your ultimate dream home.  Do your homework, be prepared before you hit the streets shopping for your home.

Remember being pre-approved for a Home Loan is an essential first step when you're ready to buy a home. It tells everyone involved you want to buy a house, you're serious, and you are on the right path. 

“All serious offers, should have a pre-approval letter from a legitimate lender, if the buyer plans to finance their purchase.”

- Paul Kaplan