I get questions from every direction about the differences between Pre-Qualification, Pre-Approval, and a Commitment to Lend Letter. Now, understand, different brokers use different criteria for what defines these three things. Lenders too. But as a buyer or seller, think of these three "Letters" as different degrees of approval. I'll explain them as they apply to my brokerage.
A Pre-Qualification is basically the initial step in BEGINNING to put the finance wheel in motion. With my company, we consider an applicant Pre-Qualified when we have taken either a phone or face-to-face interview and gotten the nuts-and-bolts of the transaction. Borrowers Information, Credit, Employment, Income, Property Information, Down Payment (if any), etc. After reviewing this information, if a lender has a loan program that can accommodate the applicant and their goals, they are Pre-Qualified. Which leads us to the next level in the approval process.
A Pre-Approval is issued when we have taken all of the information above, we VERIFY (through written documentation) that what our applicant has told us is, in deed, true and accurate. We will gather and verify recent pay stubs, recent bank statements, etc. If all this information checks out, at this point a Pre-Approval Letter may be issued to a seller or realtor. This demonstrates that with the information I have verified regarding the applicant, this applicant is Pre-Approved for a home loan, for a specific amount. On this Pre-Approval, you will see 2 amounts. One being the purchase price of the home, the other is the amount of the loan. I always list conditions associated with the Pre-Approval. These conditions are things that are still to be determined, not yet verified, or things beyond the brokers control. Examples might be:
- All employment and credit information to remain unchanged
- Acceptable appraisal supporting a value of at least $xxx,xxx.xx
- Clear 24 month chain of title history
- Evidence of Flood Insurance, if applicable
- Evidence of Homeowners Insurance
- “Clear to Close” issued from lending institution
In short, by issuing a Pre-Approval Letter, I am stating that everything the broker and lender knows, and has verified, about the applicant, tells us that we can loan for this transaction. The next stage is to document the collateral (the property) used to secure the loan. This requires the applicant to not only select a property, then order all appraisals, inspections, and insurances that protect the home.
When all of the documentation regarding the APPLICANT AND THE PROPERTY has been documented, verified, signed off by the underwriter, and APPROVED. Then a Commitment to Lend Letter may be issued. A Commitment to Lend Letter states that everything has been agreed upon with the lender, and the only thing left to do is begin the closing. This letter can legally bind the lender to make this loan. Therefore, lenders make sure that everything thing is in place and double checked before the extend this type of commitment. After which, the loan will be funded and funds dispersed to the respective parties.
The differences in these letters is, more times than not, an target for confusion between buyers and sellers. I hope this information helps you see the importance of a "quality" Pre-Qualification, Pre-Approval, or Commitment Letter. If you have any comments or questions from your own experiences, please make a comment.
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