Approval VS Pre-Approval

One of the most misunderstood item in the mortgage process is the difference between a “pre-approval” (sometimes referred to as “pre-qualification” or “preliminary loan approval”) and a "loan commitment". Knowing the differences between the two will help you avoid unpleasant surprises when you are in the process of obtaining a mortgage loan.

It is important for consumers to understand that for most mortgage loans, the lender will verify various items about you and the property before the lender will provide the mortgage loan (Note - there are loan programs that do not require verification of income and/or assets, but these programs usually have higher interest rates). The verification process includes such items as your income, employment history, assets, credit record, the value and condition of the property, and the status of title to the property. The verification of a particular item can take on many forms. For example, verification of income could be performed via your tax returns, pay stubs, W-2s, and/or a letter from your employer.

The typical process followed by most mortgage lenders is to first perform a pre-approval. With this process, the lender will take a loan application and obtain a credit report. The information in the application and the credit report are analyzed by the lender, and then the lender will issue a decision (either verbally or in writing) on whether or not you are qualified for the loan. The pre-approval will state that you are qualified for the loan subject to verification of certain items. Thus, it is important to note that the only item that has been verified is your credit history via the credit report.

The next step is the verification process. During this process, the information on the application is verified (i.e. income, employment, assets, etc.), the property appraisal is ordered, and the title search is ordered. Once these activities are completed, the lender can then issue a loan commitment.

Do most pre-approvals result in loan commitments? Assuming the lender is diligent during the pre-approval process, yes. However, it is not uncommon for a consumer to receive a pre-approval and then find out later that the pre-approval was subject to conditions the consumer could not meet, thus prohibiting them from receiving the loan, or forcing them to accept a loan at a higher interest rate or lower loan amount.

Consumers need to be particularly aware of lenders that promote “loan approval in 24 hours” or other similar claims. What these lenders are really saying (and let’s hope they are not trying to be deceptive) is pre-approval in 24 hours. In fact, most lenders should be able to provide a pre-approval in 24-48 hours. But remember – until the information is verified, you do not have a loan commitment.

Now, there is nothing wrong with obtaining a pre-approval. This is an important first step in obtaining a mortgage loan. A pre-approval is particularly important when the loan will be used to purchase a home, as it provides you with a good indication of the loan amount you can receive (and thus the price range of a house you can purchase). But keep in mind, your ultimate objective is to obtain a loan commitment.

As a consumer, what can you do? We suggest the following:

Simply understanding the difference between a pre-approval 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 pre-approved for a loan.

Insure that you are working with a reputable lender. If the lender is sloppy in the pre-approval process, it could mean problems down the road.

Work closely with your lender and provide the documentation it requests as quickly as possible. The faster you can provide the documentation, the sooner you will obtain the loan commitment.

Once you have supplied all the necessary documentation, the lender should issue you a written “Loan Commitment Letter”. This document will typically state that your loan approval is subject to certain conditions. Review these conditions carefully to insure that you can meet all the conditions.

At Reed Mortgage, in most cases we provide a preliminary loan approval in less than 24 hours, and for many loan applications the preliminary loan approval will be provided in less than 1 hour. And we issue a written Loan Commitment Letter when your loan is approved.