By Jim Pendleton - Mr MortgageTM
Which One is right, What Should You Ask For and what
should it say?
Prequalification Letter Vs Preapproval Letter: What is the difference to you?
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Remember that when you look into the fast moving world of real estate transactions, both purchasers and
professionals sometimes use the words “prequalification” and “preapproval” interchangeably. So, when using the
wrong word in place of the correct word, you often find yourself in a very sticky situation. We are about to
compare now between prequal letter to a preapproved letter, in finite detail. Here is the total explanation
for you: The problem is, they mean two totally different things.
Now let’s look at how things go when you view things which sometimes work out. Here you are the potential
buyer of a home, ready to make an offer on a house. Now this is when your realtor tells you that you need to get a
“prequal” letter from your lender to submit with the contract. You receive the prequal letter and give it to
your realtor. The letter is then submitted with the contract and accepted by the seller. Great news! Or is it? The
contract states that you must close within 31 days and you could not be more excited. Now, let’s fast-forward to
day 27. Your lender calls you to let you know that your loan was declined.
You were prequalified! Well, this is one of those times when you must understand what the definition of “is”
is. So then you may be when you view things which sometimes wondering how could something like that happen,
you ask? There are significant differences between being prequalified letter and being preapproved letter.
Knowing what they are beforehand can determine whether you actually close on the transaction or not.
We will now look when you view things which sometimes at the process for you get pre approved, this means that
your lender has not only reviewed your loan information as in the prequalification stage and also taken that loan
through several other steps to insure loan commitment. The process is called the credit underwriting stage, and it
is critical to make sure that the borrower is credit approved. This requires collecting the documentation to
support the loan request which is then reviewed by the lender. Then theW-2’s, pay stubs & tax returns are
reviewed in order to verify income. Your employment is also verified. You must also have the funds necessary for
closing and after closing reserves which are verified using bank statements, investment statements, and retirement
assets. When you look at the file, the next step is to pull a credit report that is carefully reviewed and prior
mortgage history is verified. All gathered facts are then reviewed and compensating factors are considered.
Then the underwriter assures the lender that the documentation supports the loan request in accordance with the
guidelines for the requested loan program.
When you look at prequalified letter or prequal does not mean the home buyer can get a loan. As important as is
sounds, preapproved letter from a lender can work. Sometimes, unknowing home sellers accept offers
without asking the question, is the home buyer is qualified or not. Then, when the deal falls apart, the home
seller only found out several weeks later that the home buyer couldn’t get the mortgage loan. In this case, you not
only have to let the buyer back off, but also have to refund the earnest money back to the home buyer.
If there had been a satisfactory review, the credit underwriting is completed, You are now armed with the
preapproval letter that can help you find the home you are qualified to buy. A prequalified letter is not enough in
When asking for a prequalification letter, be sure to stress that you just want a
letter stating that you are prequalified for a loan, and that the prequalification is subject to further review and
You need to get serious about the house you want, you will need to understand the difference between
these two terms. The real requirement is to have that “preapproval” when you submit the contract. This will prepare
you so you can submit your offer with confidence. You will be knowing that the loan is ready to go as soon as you
get the contract and the appraisal. The process usually takes a little more time, but that is where a little
planning comes in. You could get started just a few weeks before you plan to go house hunting, this will
save an enormous amount of time, pressure, and anxiety on everybody’s part when you do find that “home of your