Prequalification vs. preapproval: Not knowing the difference could cost you

Question: Dear Kari, My husband and I hired a real estate agent to help us buy a home. We met with our agent's preferred lender and filled out the loan application along with providing all of our financial documents. Then we received a letter from the lender describing how well qualified we are for a loan. Confidently, we made a full price offer on a home we really liked but to our dismay, our offer was rejected. Our agent explained there was another offer the sellers accepted, because that buyer had a better loan letter. We are dumbfounded. Can you please explain? Answer: Thank you for your important question. I am deeply sorry for the both of you experiencing such a disappointment. The other buyer's offer must have presented a stronger lender letter, which is referred to as the preapproval process which demonstrates their ability to close the deal. Unfortunately, this happens more often than you'd think. This is why some agents won't jump to show buyers homes until they have completed the preapproval process. When buying a home with a mortgage loan, there are two specific processes, the prequalification and the preapproval. These are often used interchangeably by buyers, sellers, agents and lenders, however there are distinct differences. Both processes are how mortgage lenders determine the dollar amount buyers can afford to borrow for their home purchase. The difference is the level of in-depth dive and verification requirements by the lender. Prequalification is an initial, quick assessment based on unverified self-reported information whereas preapproval involves a more thorough study along with verifications by the lender of the entire financial landscape of the buyers. Process of prequalification: · A preliminary step that provides a general idea of your borrowing power but no proof of income or debt. · May include a soft credit check. · This beginning stage is mostly for the buyers and their agent's insight. · This process can take just a few minutes over the phone or online. · Not able to work with a lock-in loan rate. · Does not guarantee a loan, as the lender will still need to conduct a full review. · You receive a letter indicating the lender's willingness to lend you a certain amount, subject to conditions being met. · Since a prequalification lender letter is not a binding statement, there will be some language in the fine print. This will clearly state a full loan assessment still needs to be conducted or the loan will not be provided. Process of preapproval: · Requires all documentation, verifications of assets, debts, income via tax returns, pay stubs, employment history, etc. · Includes a hard credit check by the lender. · Can take several days or longer to obtain the answer. · Provides the option of locking in your loan rate and fees. · Provides agents and sellers proof of your ability to get the mortgage loan and at the set amount. · Once fully approved, you will have a firm commitment letter from the lender to proving the financing for your home purchase. Now we can realize why a preapproval letter can carry more weight than a prequalification letter, thus creating a stronger position for the potential buyers. If you're just starting to think about buying a home, getting prequalified might be a good idea. However, in the event you are a confident homebuyer, I would advise skipping the prequalification process and go straight to the preapproval process. Happy house hunting! Kari McCoy, CRS, has been a Realtor for 30-plus years and owns the Kari McCoy Group.