The Difference Between a Pre-Qual and a Pre-Approval

Prior to getting into maximizing the marketing power of a Pre-Qualification, I would briefly like to go over the difference between a Pre-Qualification, and Pre-Approval. Many people (not just clients) use the two terms synonymously when they should not be.

The Pre-Qualification process can be considered a mini-loan process. The loan officer speaks with the client, typically no documents are collected at this time, and credit is run. After the credit check, the loan officer gives a rough estimate as to what can be done with regard to financing percentage, rate, and programs. The file is not run through an underwriting process, but it does meet very general loan criteria such as debt to income ratios for a purchase, etc.

Essentially, the pre-qualification letter is one of the initial pieces of marketing material that you provide to your clients. Most L.O.’s use these letters instead of a Pre-Approval because they are quick and easy to complete. Generally speaking, information used in a pre-qualification is vague. The figures provided (such as loan amount and loan to value ratio) are only rough estimates stating what could possibly be approved through underwriting.

The Pre-Approval process is a more complete than a pre-qualification because it is a conditional approval from underwriting. Similar to the pre-qualification process, the LO speaks with the client, and checks credit status. Loan documents are usually submitted to the LO, and you now have the start to a full loan package. The loan is then run through initial underwriting. When the loan is approved via underwriting, there will be conditions (or stipulations) attached to the loan. This is stated in the content of the letter.

In the same thought, the content within the pre-approval letter gives more buying power to the client and the Realtor because it shows that they have actually been approved for the loan via underwriting. The conditions are plainly stated on the letter with all of the financing terms like financing percentages (loan to value ratio), highest loan amount available to the client when taking taxes and insurance into consideration, type of loan program, term of the loan, etc. Typically, the conditions will range from the appraisal to desk review of purchase. Again, these letters provide a better sense of security to both the buyer and the seller!

You are all probably reading this and saying to yourself that you are now going to be doing pre-approvals instead of pre-qualifications. Here are a two tricks on how you could use both letters and help retain your client and cultivate a solid relationship with a Realtor:

1. Use the Pre-Qualification process as an intro into your relationship with the client as well as the Realtor
2. Use the Pre-Approval as a “courtesy” when they are thinking about putting an offer on a home

Now, how can you start to really maximize your Pre-Qualification letters and process? You’ll have to read the next post for more which will be on Wednesday, January 2, 2008! Have a happy and safe New Year’s Eve!