When working with homebuyers in Dublin, Livermore, San Ramon, and Pleasanton, I am often asked to explain the difference between a pre-qualification letter and a pre-approval letter. If you visit the forums on Zillow and Trulia on loans, you will frequently see comments from disappointed consumers on how they have been pre-approved or pre-qualified for loans, only to be rejected by a later step in the process. While no legal definition exists for either term, a pre-qualification is, in general, a loan originator’s guess as to your ability to qualify for a home loan and the pre-approval is an underwriter’s signature that you are approved, subject to conditions. Lenders are not always forthcoming about how the process really works, because telling their customers that they have been pre-qualified or pre-approved is often easier.

When you are ready to check out the homes, you want to work with a lender that is ready to do more than simply pulling your credit report. The lender should be willing to invest the time and effort to assemble all of your financial documents, verify the information on the loan application, and submit everything to an underwriter for review. The underwriter will either approve the loan with conditions or deny the application. The underwriter typically will not look at your loan, unless you are already in contract for your home. This requirement puts the homebuyers at a disadvantage, because often they have already become emotionally attached to the homes. Either way, you will know where you stand and can plan accordingly.

The pre-approval process is easy and affordable. The only cost to you should be the $20 for a credit report. If the lender asks for an upfront application fee or something more than the $20 for a credit report, look for another lender. Completing the application can be as convenient as using an online form on the lender’s website, a telephone interview with the lender, or in-person meeting with the lender.

Once you have completed the application, be prepared to deliver your financial documents for the underwriter to review. The standard documentation required by the underwriter includes pay checks, bank statements, W2 forms, and tax returns.

Assuming you have provided the lender with all the required documentation, the time between when you start the application to when the underwriter receives your loan should not be more than two weeks. Once the underwriter has all the files, you can expect to wait for another three to four days before receiving your written pre-approval.

For most customers, I usually recommend a full pre-approval process. There are just too many guidelines to get tripped up on, and there is too much of your time and money at risk once an offer to purchase a home has been made. Why would you want to risk that all by postponing the loan approval process? If you are looking at homes with the intent on purchasing, then you should ask your lender to fully underwrite your loan application. If they are unable to do that for you then you should take your application to another lender who will.

Scott Hill has 14 years of experience in the lending industry. In that time he has directly helped over 1,000 families finance the purchase of a new home or refinance an existing loan to a lower interest rate. Please call (925) 829-9131 or e-mail Scott@ScottHillTeam.com for more information.