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Prequalifying vs. Preauthorizing vs. Preapproving Letters

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Winchester Mystery MansionMy friend recently started the wonderful journey that is the path to homeownership by submitting his information to LendingTree. Through LendingTree you can help determine what the bank(s) believe what homes are considered “affordable” to someone with your income and assets. While your own perceptions of what is affordable may be more aggressive or more conservative, having that additional data point helps. In talking with Miller, we both were getting confused as to the various terms. I remember getting a preauthorization letter, he’s working towards getting a prequalifying letter – though it sounds like we were providing the same types of documents… so what’s the difference? Were we just talking semantics? Here’s the difference:

Prequalifying Letter

A prequalifying letter is issued after a brief discussion with a mortgage lender, it requires no documents and is non-binding for the lender who issues it. The idea behind it is that you lean on the mortgage lender’s experience to give you an idea of what you are likely able to afford. You provide no documents and there is no credit check, the lender simply takes your word at face value and issues you the letter.

The value of the letter is in the eyes of the beholder. The seller knows you’ve at least talked to a lender but they can’t reasonable assume that just because you have this letter that financing is a sure thing. However, having this letter beats having nothing at all.

To give your letter a little boost, you can request that the lender check your credit and indicate on the letter that a credit check was performed. The number one reason for a loan falling through is that a credit check gave the lender cold feet (and given the current climate, they get cold feet a lot more now than they used to!).

Preauthorizing letter is another term for a prequalifying letter.

Preapproval Letter

If the prequalifying letter is the little bunny rabbit, then the preapproval letter is the roaring lion of the two. Preapproval letters are issued when you actually make a loan request, provide all the documentation, and the lender agrees to loan you the funds on the condition that the property appraises for enough and the title review comes up clean. You will have to submit all the paperwork (W-2s, bank statements, etc.) and be subjected to a credit check because the difference is in verification of your financial situation because the bank is agreeing to lend you money.

This letter is better in negotiating with sellers because it shows that: 1) you’re serious because you already talked to a lender, and (more importantly); 2) a bank has agreed to lend you money subject to some standard conditions. There are other benefits to this, such as a more diligent real estate agent (with this letter, you’re serious… not just window shopping), but the main benefit is with the seller – you are in a much stronger position.

Preapproval letters are not binding. The house hunting process can often take many months (I know someone who looked for a year) and so your financial situation could drastically change, it would be unfair to keep a lender (or you) to the terms of the letter. Whatever the reason, it’s important to note that this letter is not binding.

It’s All Semantics

In my research, I’ve seen a lot of places refer to a preapproval letter as a prequalifying letter and a prequalifying letter as a preauthorizing letter (and vice versa). Ultimately, the difference is in the rigor and due diligence of the review. If you are required to provide actual statements and W-2s, you’re getting the “Preapproval letter;” if you’re just chatting it up with no verification, then it’s “Prequalifying Letter.” Either way, the real estate agent and the seller will easily be able to tell the difference regardless of the document’s name and you’ll get the credit you deserve for it.

(Photo by yogi)

{ 6 comments, please add your thoughts now! }

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6 Responses to “Prequalifying vs. Preauthorizing vs. Preapproving Letters”

  1. bearmtnridge says:

    But couldn’t the Prequalifying letter be considered the same as “stated income” someone can say anything and waste a sellers time. I think people are still looking for the preapproval letter that someone is a serious canidate.

    If I had two people one with prequalifying letter offering more and one with a preapproval letter offering what it’s listed as I think I go with the preapproval if time was an issue. It may take the first buyer longer to go thru the approval processs and then be declined.

  2. Tyler says:

    I think that this is a hot button issue now in certain markets where homeowners are looking to get out from under a proeprty in a hurry. It makes sense in that instance that a seller may accept a lower offer from someone who has the pre-approval letter in hand.
    Of course, in “up” markets we get greedy and hold out for the highest offer 🙂

  3. Miller says:

    Darn, I wish I had read this earlier before talking to those lenders all day again!

    I particularly agree with your “its all semantics” paragraph. Still now, holding two such letters in my hand, I don’t know exactly what I have! Both lenders asked for A LOT of information (including credit checks and statements), yet I don’t even have a property in mind yet. One lender made a pretty official looking complete cost break down with estimated closing costs, taxes, etc. The other just gave me a letter saying I am pre-qualified for x amount of money.

    It’s confusing… I just hope I got what I needed in the end!

  4. You’re right, it is all semantics. But these days its all about getting the approval from the underwriter. When we closed there was another couple down the hall that had their loan YANKED at the closing table. The underwriter called at the last minute to say they would not be able to back the loan.

    So its not over until the underwriter sings.

  5. Murphy07 says:

    Well, I was just told by a realtor that had ONE and only one property that I wanted to see that I needed to complete an entire loan application before he would show me a property. By the way, HE just happens to be a loan officer!! A prequalifying letter from someone else wasn’t good enough.

    So, I called another realtor to show me the property. They were happy to oblige, BUT they asked why I would want to see that property since it was already sold. They also said Realtor #1 MUST have known, since he was the listing agent.

  6. DW says:

    Good article. I’ve been trying to figure out what each of these terms means, since I am in the process of buying my first home. I just felt like all of this terminology was like learning another language until I started researching online. Thank you.

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