Misconceptions of Pre-Approval

preapprovalPreapproval in lending has two meanings:

The first is that a lender, via public or proprietary information, feels that a potential borrower is completely credit worthy enough for a certain credit product, and approaches the potential customer with a guarantee that should they want that product, they would be guaranteed to get it. This rarely happens in the financial services industry, and when it does happen, it is usually loaded with fine print that is not immediately disclosed. Usually, what happens is prequalification, instead.

Although, to a typical consumer, you’re pre-approved means you already passed the approval process and therefore are guaranteed to be immediately granted the loan if you apply, the literal meaning is different. The literal meaning is at a stage before approval. Thus, the term preapproved is often used by advertisers to induce consumers to apply for the advertiser’s offer.

The legal meaning however is varying depending on circumstances surrounding the overall context of the offer, and federal and state laws applied regarding individual consumer claims, and/or actions brought by consumer advocation agencies.

The second meaning relates to mortgage lending. People interested in buying a house can often approach a lender, who will check their credit history and verify their income, and then can provide assurances they would be able to get a loan up to a certain amount. This preapproval can then help a buyer find a home that is within their loan amount range. Buyers can ask for a letter of pre-approval from the lender, and when shopping for a home can have possibly an advantage over others because they can show the seller that they are more likely to be able to buy the house. Often real estate agents prefer to work with a buyer who has a pre-approval as it demonstrates that they are well-qualified to receive financing and are serious about buying a home.

A preapproval is based on the documentation the borrower supplies at the time of application, and any actual eligibility to receive the preapproved loan depends on the terms and conditions of the pre-approval and ability to secure the loan before the pre-approval expires.

Many credit card companies and other money leading companies, will send out letters to people using the terms You’re preapproved. This is disingenuous by the companies because they fully know that many consumers will see it and believe it means they have already passed the approval process when in fact they have not.

What is the Difference between Approval and PreApproval?

Simply understanding the difference between a preapproval and a loan commitment is key. If a lender says you are approved for a loan and you have not yet supplied any documentation to verify your assets, income, and/or employment, recognize that the lender is really saying you are preapproved for a loan.

According to the Consumer Finance Protection Bureau, there is often not a lot of difference between preapproval and prequalification. Sometimes, lenders use the terms prequalification and preapproval interchangeably. And different lenders might have different definitions for each. But generally, here’s how the two may differ.

Pre-qualification is often seen as the first step in the mortgage process, and pre-approval is the next step. With pre-qualification, you’ll supply an overview of your financial history to the lender, including income, assets, debts, and credit score. The lender will review this information to give you an estimate of what you would qualify for. Mortgage pre-qualification doesn’t always require documentation of your financial history; it can often be self-reported. Mortgage pre-approval is very similar, but it usually requires documentation and verification of your income, assets, and debts. And it will often require a credit check, which will result in a hard inquiry on your credit report.

The Similarities of Pre-Approval and Pre-Qualification

Mortgage pre-approval and mortgage pre-qualification have the same great benefits for anyone considering purchasing a home with a mortgage:

– Both can help estimate the loan amount that you will likely qualify for. This can help you save time by starting your home search by looking only at homes that you know will fit in your budget. And it will also prevent the frustration of finding out that the house you wanted to buy is actually out of your budget.
– Regardless of whether you have a pre-approval letter or a pre-qualification letter, both can help show sellers that you’re a serious contender when submitting your offer. For a seller to confidently accept your offer, they’ll want to know that you’ll be approved for a mortgage and the home sale will close. A pre-approval letter or a pre-qualification letter can help demonstrate that you have a good chance of being approved for a mortgage for the amount that you’ve offered on the home.
– Many sellers will require a pre-approval or pre-qualification letter if you’re planning to get a mortgage. If it’s not required, a pre-approval letter or pre-qualification letter may help your offer stand out. This can be especially helpful in competitive real estate markets.

In addition to the benefits mentioned above, it’s important to remember that neither pre-approval nor pre-qualification is a guarantee that you’ll receive a loan from the lender. You are also not obligated to get a mortgage form the lender who pre-approved or pre-qualified you. While many home shoppers opt to apply for a mortgage with the lender who pre-qualified or pre-approved them, it is common practice to shop around before applying for a residential mortgage. *Note – shopping is fatal strategy for commercial loans.

The Web Lender Observation

The word ‘pre’ literally means before. Therefore pre-approval and pre-qualification literally mean before approval and before qualification. When taken in the literal sense both documents are meaningless. The concept widely accepted in real estate that these documents are relative to a transaction is in error. There are two lines of thought. The first is acquire the loan and then find the property. The second is find the property then find the loan. While the first is more commonly used, the second makes much more business sense. As stated above, the term preapproved is often used by advertisers to induce consumers to apply for the advertiser’s offer.

 


 

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