With so many real estate terms floating around the internet, home sellers are often misguided when it comes to understanding what they mean. One great example can be seen when it comes to mortgage loans; home sellers need to be wary of prequalified homebuyers who appear as if they are ready, willing, and able to close on a property. But are they?
The fact is, the terms "prequalified" and "preapproved" are used interchangeably quite often, and this is a gross oversight when it occurs. While there are various interpretations and definitions of either term, experienced real estate professionals want home sellers and homebuyers alike to know that when applying for a mortgage loan, there is a huge difference between pre-qualification and pre-approval!
Video Explains PreQualified Versus PreApproved
When a homebuyer has been prequalified, it simply means that a lender has provided an estimate of what the buyer can afford, based upon the information that the lender was provided.
- Buyer has been interviewed by a reputable mortgage lender
- Buyer has provided information on income, assets, debts, and down payment
- The lender provides an opinion of the buyer’s potential based upon the information provided
When a homebuyer has been preapproved, a more thorough process has been followed. A pre-approval is a conditional commitment to receive a loan, thus the lender's research was not merely conversational.
- Buyer has submitted a full loan application to include a credit check, paying an application fee, a completed FNMA Form 1003.
- Lender has verified income, assets, debts, and down payment
- The lender provides an approval letter indicating an amount and remaining conditions to be met (appraisal, title, etc.)
A pre-approval is far more desirable than a pre-qualification, but it is no guarantee that the buyer will get a loan. Too many variables and issues still exist, so this is why a home seller needs to rely on the expertise of the agent that they have selected to sell their home.
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Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.