Prequalified vs. Pre-Approved

Aren’t They the Same Thing?

There is often confusion about the difference between getting “prequalified” and “preapproved” for a loan. Don’t they mean the same thing?  It’s common to think so, but they’re actually different.

Prequalification

Getting prequalified means that you’ve contacted a loan officer, allowed them to review your credit, and provided them verbal information regarding your assets & monthly income.  The loan officer determines an approximate monthly payment for the proposed loan and makes sure that the Debt-to-Income ratio (how much you make vs. how much you pay out in monthly expenses each month) is within tolerance.  The process can take as little as 15 minutes over the phone.

Being such an informal process makes it quite simple, but adds a level of risk that the information may be misinterpreted.  Once the loan officer has reviewed the actual income and asset documentation (lender’s calculations are often different than how a borrower may calculate them) some folks find that they no longer qualify for the loan and their purchase might be in jeopardy.

Preapproval

Getting preapproved takes it a step further.  Once you are prequalified, the loan officer provides you with a list of documentation needed for review in order to verify the figures provided.   You’ll likely sit down together, he’ll make any adjustments to income & assets per the verification documents and submit the loan through an Automated Underwriting System to determine the approval & eligibility.  This process is much more thorough and gives both the borrower (you) and Realtor the added assurance that financing should move smoothly.

Here’s a list of the documents your loan officer may ask for in order to complete a preapproval:

  • Most recent LES or pay stub (total of one month).
  • Most recent 2 years of Federal Tax Returns (including all schedules & W2s).
  • Most recent 2 months of bank statements showing assets that will be used for closing.

Keep these differences in mind when you’re interviewing your loan officer, and if you are not asked to provide any of these papers to them, then be sure to ask when they will review them because you don’t want it to be after your offer has been accepted.