You are not alone if you are confused about the difference between a mortgage pre qualification letter and a loan pre approval letter. They appear to be similar, but are actually very different tools. Lets go over the basics.
Pre Qualification Letter
When you begin the process of looking for a house, it is important to start the process of getting a loan at the same time. Nothing can be more disappointing than spending hours looking for a new house, only to discover that your current financial status does not allow you to qualify for a loan that is equal to, or greater than the purchase price of your dream home. So the first step in the mortgage loan process is to get a pre qualification letter from a loan officer indicating what your estimated buying power is.
Gathering Financial Information
The loan officer will ask you for full names, addresses, phone numbers, emails, financial institutions you bank with, and other debt related information to create your borrower profile. Based on this information, you should be able to obtain a pre qualification letter indicating the estimated amount of money you can borrow toward a property. Once the pre qualification letter is in hand, you can start looking for properties that are consistent with your buying power.
Narrowing Down the Choices and Getting a Pre Approval Letter
The time will come when you begin to narrow down what house for sale you would like to make an offer on. As the list gets short, you should work with your lender to create a Pre Approval letter. Unlike a pre qualification letter, which is just an estimate of what you may be able to afford, the pre approval letter is a document you can present to sellers when you make an offer. The pre approval letter gives the seller a greater degree of confidence that you can make good on your offer. It is still not a commitment from a lender to give you a mortgage, but it is close.
Loan Application
Once a seller has accepted an offer with its associated pre approval letter, your loan agent will wrap up any last minute details about your financial status and submit a loan application for underwriting. When the loan is approved, the transaction can go to title and be processed.
In summary, a pre qualification is mostly for you and is an estimate of what your buying power will probably be. A pre approval letter is for your sellers. It tells your seller that the lender has researched your financial situation and they feel confident they can loan you up to a specific amount. When an offer is accepted, a loan application is submitted and funding is committed, at which time the title company can move the transaction toward recording and disbursement of funds.
