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Prequalifying vs. Preauthorizing vs. Preapproving Letters

My friend recently started the wonderful journey that is the path to homeownership [3] by submitting his information to LendingTree [4]. 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 [5])