Prequalification vs. preapproval, and why one doesn’t mean much

WASHINGTON — In the current, competitive housing market, it helps to be able to show a seller you’ve already got your financing ducks in a row, and a letter from the lender can do that.

Just make sure it’s the relevant letter.

Often, a borrower’s first step is to fill out an online form requesting information about a mortgage, and based on the information the borrower provides, the bank may provide a prequalification letter.

But that only means that, assuming the information the borrower has provided is both accurate and complete, and additional information required supports the loan, the borrower would qualify for a mortgage in the amount the lender’s prequalification states.

“The difference with a preapproval is that you’ve actually filled out an application with a lender, and you’ve given them the information that you have just like you did on the prequalification, however you’ve also given the lender permission to pull your credit,” Fairfax, Virginia-based Apple Federal Credit Union’s Jeffrey Long told WTOP.

“Then that lender will commit to you in the form of a letter saying that they will actually lend you that amount of money, which really helps with your purchase,” he says.

Once a borrower gets a preapproval letter, the clock starts ticking.

“It’s usually good for about 60 days. That’s how long a lender will usually issue a preapproval for, and that’s really based on the fact that your credit picture can change over that time frame,” Long said.

Apple Federal Credit Union also advises borrowers to know what they can afford, and not base that comfort zone on what the bank says it will lend.

“Often what a bank can approve you for may be more than what fits nicely within your own spending patterns and budget,” Long said. “If you don’t stay within your own comfort zone, it can put you in the position of being ‘house poor.'”

The bank’s lending decisions are based largely on objective criteria, such as debt-to-loan ratio, household income and basic expenses. A borrower may have other large expenses, such as day care, that take away an additional share of income.

What happens if a borrower is turned down for a mortgage?

Apple Federal suggests that borrowers sit down with the loan officer to discuss in detail why they didn’t qualify, and what can be done in over the next six to 12 months to improve their chances for a loan.

Jeff Clabaugh

Jeff Clabaugh has spent 20 years covering the Washington region's economy and financial markets for WTOP as part of a partnership with the Washington Business Journal, and officially joined the WTOP newsroom staff in January 2016.

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