What Your Pre-Approval Letter Does Not Mean

What is the difference between pre-qualified and pre-approved?

There are really three tiers, and the industry uses the words loosely enough that a buyer cannot tell which one they are holding.

Pre-qualification. You told a loan officer your income, your debts and your credit estimate. They did arithmetic. Nothing was verified. This takes ten minutes and is worth roughly what it costs.

Pre-approval. A loan officer pulled your credit and reviewed your documents — pay stubs, W-2s, bank statements, tax returns. A human at the lender looked at your actual paperwork. This is real, and it is what most letters in circulation represent.

Underwritten approval. The file went to an underwriter, who issued an approval subject to a property, an appraisal and a handful of closing conditions. Your income, assets and credit are done being examined.

That third one is a different instrument entirely. The first two say a lender thinks you probably qualify. The third says a lender has already decided you do.

Why listing agents can tell

Because they read the letter, and the language gives it away.

A pre-qualification letter hedges: based on information provided. A pre-approval letter names what was reviewed. An underwritten approval says an underwriter approved the file and lists the remaining conditions, which will be about the property rather than about you.

In a multiple-offer situation on a Corona tract home, two offers at the same price with the same terms are not equal if one of them is underwritten. The listing agent will tell the seller that, and they should.

What can still go wrong after a pre-approval

Plenty, and knowing what it is keeps you from doing it.

Your credit changes. New accounts, new balances, a missed payment, a co-signed loan for a family member. Lenders re-pull before funding. Buying furniture on credit during escrow has ended more purchases than failed inspections have.

Your income changes. A job change, even a better one, even in the same field. Especially a move from salary to commission or to self-employment. Tell your loan officer before you do it, not after.

Large deposits appear. Any deposit that is not payroll needs a paper trail. Gift money has specific documentation requirements. Cash deposited from a side job is usually unusable.

The property does not cooperate. A low appraisal, a condo project that does not meet guidelines, an insurance problem, a title issue. Your approval was never about you alone.

What to ask your loan officer, in these words

1. Is this a pre-qualification, a pre-approval, or an underwritten approval? Make them use one of the three words.
2. Did an underwriter look at my file, or did you?
3. What documents have you actually reviewed?
4. What would change this number?
5. Can you issue a letter at my offer price rather than my maximum? Never hand a seller a letter showing a ceiling above your offer. You have just told them what you can pay.

Why the underwritten version is worth the effort

It takes a few extra days up front and it converts your offer from a promise into something closer to a cash equivalent. It also front-loads the problems. If there is something in your file that is going to cause trouble, you want to find it in week zero, not in week three of a thirty-day escrow with your deposit at risk.

And it shortens the back half. Once you are in contract, the lender's work is the property and the closing conditions — including the Closing Disclosure the CFPB requires you receive at least three business days before closing.

The short version

Get underwritten before you shop. Get the letter written at your offer price. Do not touch your credit. And when a lender hands you a document, ask which of the three things it is — because the seller's agent is going to ask that same question, and you want to know the answer first.