Preapproval vs. Prequalification: Which One Do You Actually Need?

One thing that I wouldn't say I get asked a lot, but I have to explain a lot because I do get a lot of people when they contact us if they have been pre-approved or pre-qualified. Yeah. A lot of times it's from a national lender or an out-of-state lender and from a realtor perspective, which of those two things they have done is very important and you can't always tell because lenders call Yes. a pre-qual, they call it a pre-approval or vice versa.

And I don't know about other states, but in Missouri there's no rule or regulation about what you call that letter that I'm aware of. And so it matters a lot and so let's just talk about what the difference is between We'll just use our terminology for it, but a pre-qualification letter versus a pre-approval letter and what is what it goes behind that before your realtor takes that and then submits that with an offer. Yeah, so pre-qualifications, even pre-approvals, unfortunately, it's the wild west. As much

regulation that exists in my industry, I see crazy things done all the time with borrowers that simply fill an application out, put their social security date of birth, put their income in. They and a lot of times they just kind of guess their income because you know, for a lot of folks, unless you actually look at your pay stub and try to calculate exactly, you know, if you're paid hourly, trying to calculate exactly how much you make for that year, a lot of people will understate

or overstate their income and they'll put it on the application and I've seen some lenders not actually verify pay stubs, not look at W-2s, not look at bank statements, not even completely look at the application, but then issue a letter. Now, what I feel bad about is that a borrower that's not in the industry thinks that that's wonderful. That's so easy. I barely had to fill anything out and I get this letter. And they think that that letter is as valuable as the letter that my

team provides where we look at maybe a hundred different things. We try to proactively look at the things that we know are going to come up later. And that's the big thing. The lenders that just hand the letters out but don't actually review anything, the disservice that they're doing to the buyer that the buyer doesn't realize is that there are going to be things that are going to come up because all of these programs for the most part are government agency programs that have the same

requirements. And I we can get into that later because we do keep a lot of our loans so we don't have extra requirements above and beyond the government agency requirements. But all of the programs have like a baseline of these things are going to have going to have to be submitted. They're going to have to be reviewed. And then they're going to have to be within the tolerances of whatever the loan programs will allow. I know you and I have had some deals with where another

lender has provided your buyer with a letter. And then it was pretty obvious at some point in the transaction that that lender had not actually really reviewed everything closely. I know we had one where they had a situation. It was a divorce. And community communicated that really clearly to the lender but the lender didn't take that extra effort to actually go and talk to underwriting to see how you know, how all that was going to work out in the end and then it created an issue.

Right. We really don't We try I you know, over 20 years you can't say that you are perfect cuz that's impossible. But we are constantly trying to learn and stay in front of those things so that we get the the hard things out of the way by the time that your buyer gets the letter. That way when they find the house there's already a bunch of things to do. So they have an inspection, they have an appraisal, they have a lot of those things

that they have to take care of. They want to get the heavy lifting, in my opinion, out of the way before they get the letter and before they submit their offer. So, you have the pre-qualification letter, which is the wild west. I mean, that that basically means that the lender didn't actually take it to an underwriter. To be fair, we mainly hand out pre-qualification letters and Zac, I think you would agree, that's because most listing agents know myself, they know my team. Yeah. They

know that I don't just hand those letters out. Now, in other markets, because I am licensed in 10 other states, some markets require a pre-approval letter. It takes a little bit more time, has to go in front of an underwriter. I would argue that our pre-qualification letter is on par with a pre-approval letter because we we even have Kathy, who I mentioned is on my team, she is a former underwriter. So, she looks at things really through a fine-tooth comb, if you want to say, before

we even hand that letter out. So, would you say, just in the simplest form, a pre-qualification letter is the lender taking what the purchaser has stated on their application and then saying, "This fits the basic requirements." Whereas, more of a Yeah. There's a spectrum to answer that question. Okay. So, some lenders, I believe their philosophy is they want to throw everything at the wall to see what actually sticks. They want to come across as the easy lender. Yeah. up

front by just barely getting anything from you other than just a few bits of information, giving you a letter and giving you really this false illusion that this is going to be an easy process, but they really have no idea if your loan's going to close. And I know people find that hard to believe. And sometimes when I explain this to people that like if they they met with someone, hardly asked them anything, gave them a letter, and then we're going through like just asking for

for things like pay stubs, so that way we can make sure that we document income appropriately. They'll say comments like, "Wow, the other lender didn't ask me for that." And eventually, as they get through the process with us and that we explain everything to them, the light bulb goes off and they're like, "Oh, that kind of is a big deal because I am going to have to turn those things in. I would rather the lender looked at those now versus later and maybe find a problem."

Yeah, and and kind of to piggyback on that from a realtor perspective and and we didn't really hit on this, but it's very important that you have, one, a local lender, in my opinion, somebody that the community trusts and and the community of realtors trusts because it matters to me more if I get a uh pre-approval with an offer from Flat Branch than I do from just some random lender I've never heard of. It changes the way I advise my clients and and

whether to take an offer or not. And then the second thing is you want that letter before you go searching for houses because if you find a house, certain houses, at least in our market, move very, very quickly. And so you don't want to find a house of your dreams, go through the process of getting a pre-approval letter, and then it getting sold out from underneath you because you weren't ready to make that offer. So The single biggest mistake I tell home buyers is that

most of them don't start the pre-qualification process early enough. Yeah. Yeah. And I I get it. They they want to see what's out there, and then they, as you know, they oftentimes find things sooner than they thought they were going to. Yeah. And we certainly make that work. But if you take a borrower that makes their application, they've not started searching yet, so they're not rushed, they're not stressed out, takes 10 to 15 minutes to fill that out, takes a little,

you know, a few minutes to gather just a few financials to send to us, let us work on it for free. We do a soft inquiry, so it doesn't even count as a hard inquiry. Yeah. Um we end up doing a hard inquiry later on. one the things people are concerned about is, well, I don't want it to hit my credit a bunch. And then the other thing I hear a lot is, well, we may not be buying for 3 or 4

months. I don't want to do it now because it expires. Great thing to bring up. Yeah. So, our our pre-qualifications we have to put an expiration date because even with a soft pull, that soft pull does eventually Uh sure. become non-relevant. Yeah. Yeah. You know? So, we do have to put an expiration date, but the person doesn't start the process all over. It's actually super simple. If they get to, you know, 3 or 4 months, they haven't found anything, we

check in with them. We just confirm, has anything changed? Still working at the same employer? Is your income the same? Um can we do another soft pull on credit? Again, these soft pulls don't count as hard inquiries. Do that. Basically, the work's on us at that point to update it. They just have to verify a few things. We might have them send us a new pay stub, especially if their pay has changed at all. And then we can easily update it, and then it's ready to

go. Okay. That happens all the time. I would say more Oh yeah. Oh yeah. I don't know what the percentage is, but it's a decent percentage of people that we pre-qualify, and then it might take them 6 to 12, sometimes even 1 to 2 years before they end up making it, finding that house, and making an offer. Absolutely. Does save you time, too, looking in price points that, you know, you may or may not qualify for, as well. Although for me

as a realtor, that's not that big of a deal, but as big speak to this more than I can, but don't you see sometimes people are pre-qualified, but they have no idea what an estimated payment would be? Oh yeah. Yeah, I get asked very very often, like, "Hey, what's the payment on X number of dollars?" And then, you know, there's so many factors that go into that because it's to without getting too deep into the woods, but if the roof is 20 years old

versus 5 years old, that dramatically changes your insurance payment, which dramatically changes your payment. And so, there's a lot more to shopping for your payment than just the total amount if that makes sense. we pre-qualify someone, I believe a good lender is going to come up with two or three estimated payments in different price ranges based on the loan program because that's the other thing that a buyer wants the lender to research for them. Out of all the loan programs, which loan program is going

to be best for them? Sometimes it's one, sometimes it's a couple different programs. Then after that's determined, calculating, you know, two or three different price points, trying to estimate for them homeowner's insurance, real estate taxes. We go to a great effort to circle insurance and taxes and tell them we're estimating those, but we really try to be realistic on what we're estimating. Yeah. Yeah. What I do find, especially with the online lenders, because I click those buttons too, just I'm just curious. Yeah.

I click those buttons too and they a lot of times will, I believe it's intentional. It's my opinion. Particularly insurance. homeowner's insurance, real estate taxes. And the borrower's like, "Well, the payment's less." Then they find out that you can't, you know, just because the lender estimated those, at the end of the day they're going to be the same with regardless of the lender that you get. You just want You want to work with someone that's going to be realistic with you up front so

that you're not surprised and stressed out later that your payment's $100 more than you thought it would be. Yeah, I mean, the worst thing in real estate is surprises. Yes.