Anyone who ever intends on buying or selling a single parcel of real estate in their lifetime should take a few moments to familiarize themselves with one of the most mischaracterized concepts in the field of real estate financing: the difference between being "pre-qualified" for a mortgage loan and "pre-approved". Often the terms are used interchangeably by buyers, sellers, real estate agents, and unfortunately even some mortgage brokers. I have seen more than a few ads from lenders who claim that they can "pre-approve" you for a mortgage in fifteen minutes or less over the phone or Internet without so much as ever seeing one W2 or pay stub. Horror stories abound from sellers who thought the buyers of their home were "pre-approved" only to find out after tying their home up in a purchase agreement that they were only "pre-qualified" and possibly not able to obtain financing at all. Not to mention the scores of disappointed buyers out there who have made offers on homes they have set their hearts on thinking they were pre-approved only to find out that the conditions of their loan could not possibly be met when it came time to go to underwriting.

A written pre-qualification letter from a lender is non-binding. Based on a very informal review of the buyer's financial condition and credit score (oftentimes just a quick check of the social security number and not what is called a tri-merge credit report ran simultaneously through the three most popular credit bureaus and then by using the median score, a credit score is determined) and depending solely upon the honesty of the buyer about his/her employment history, salary, and outstanding debts/monthly payments, a non-binding determination is made as to the amount of loan the buyer should be able to borrow. It is hardly a commitment but instead says under the right conditions and future verification of those conditions, the borrower would qualify.

A letter of pre-approval from a lender, however, is a written commitment from that lender to loan money to the buyer and made only after the lender has done a thorough credit check for mortgage purposes, verified employment and income, and looks at the type of mortgage that would best suit the buyer all the while taking into consideration the buyer's financial situation. Based on the positive results of all of the above, the buyer is issued a letter of pre-approval for the loan still setting forth a few conditions such as an acceptable appraisal and that the buyer's financial situation does not change prior to closing, and stating the amount of loan the buyer may borrow. From start to finish, the process can take several days to complete. It should now be apparent why promises of "loan pre-approvals in 15 minutes or less" should be viewed with a healthy dose of skepticism.

Many agents will tell you that a pre-qualification letter is not worth the paper that it is printed on, but as a former loan originator, I don't necessarily agree. After all, any time a buyer has been proactive in looking for a mortgage before finding the home of their dreams, it usually means that some lender has already asked them about glaring red flags such as bankruptcies, foreclosures, judgments, etc. that would preclude them from getting financing and those buyer's are weeded out early. Today, most buyers are more familiar with credit scores and, if honest with the lender, should be aware of what issues could prevent them from getting approved. A buyer may not know the difference of pre-qualified and pre-approval, but serious buyers who do sometimes save themselves the stress and the possible heart ache by consulting with a reputable lender before beginning their property search and knowing just exactly how much home they can purchase. Pre-approval is power when a buyer competes for a home against a buyer who does not have a pre-approval letter. Conversely, savvy sellers will take care to choose an agent to represent them who always insists on an accompanying letter of pre-approval with a purchase agreement and knows the difference between the two.