Pre-Qualification vs. Pre-Approval: What Maryland Buyers Need Before Making an Offer

Pre-qualification vs. pre-approval: side-by-side comparison

According to the CFPB, both letters say a lender is generally willing to lend to you up to a certain amount, based on certain assumptions, and neither is a guaranteed loan offer. Lenders use the words differently: some issue a prequalification letter based on unverified information you report and only issue a preapproval letter based on verified information. Because the label alone tells you little, the CFPB suggests asking a local real estate agent whether your letter will serve its purpose.

In Scott's words: "A pre-qualification letter from a bank or mortgage broker that is not reputable is not worth the paper it is written on. The listing agents know this and will be very careful with sketchy lenders."

What a pre-approval requires: documents checklist

Freddie Mac says that to get pre-approved you complete the lender's loan application, likely providing documents such as your W-2, bank statements, credit report and tax returns. The lender looks at capacity, capital, collateral and credit (the "4 C's") to decide how much you may qualify to borrow. Have these ready:

• Recent W-2s and tax returns
• Recent bank statements for your down payment and reserves
• Authorization for the lender to pull your credit
• Information about your debts, work history and residential history
• For service members: your most recent Leave and Earnings Statement (LES) and your VA Certificate of Eligibility (see below)

Freddie Mac also reminds buyers that the amount on the letter is the lender's maximum, not necessarily what you should borrow. Borrow only what you are comfortable repaying.

How long a pre-approval lasts and how to renew it

Pre-approval letters expire. Freddie Mac says you can generally expect a letter to remain valid for 30 to 90 days, and to ask your lender how long yours lasts. The time limit exists because your finances can change, and the lender wants the credit, income, debts and employment it relied on to still be accurate.

If your letter expires before you find a home, you can usually renew or update it by giving your lender current financial documents. Expect the lender to recheck your credit, reverify your income and confirm nothing significant has changed. To keep a pre-approval on track:

• Avoid new debt and large credit purchases.
• Pay every bill on time.
• Tell your lender right away if your job or income changes.

Scott's warning: "The one thing a buyer can do that can blow up their pre-approval is have a major change in their credit. They can have a late payment show up, have their score dip due to extending current credit, or do something that can adversely impact their ability to qualify such as buying a new car before they close on their house."

Does getting pre-approved hurt your credit?

A lender's credit check is reported as an inquiry, which the CFPB says typically has a small negative effect on your scores. Shopping lenders does not multiply that effect: within a 45-day window, multiple credit checks from mortgage lenders are recorded as a single inquiry, so you can get multiple preapprovals and Loan Estimates. Checking your own credit report does not affect your scores, and the CFPB suggests checking it for errors before you apply. Avoid applying for credit cards, car loans or other credit right before or during the mortgage process.

When should you start? "We tell Buyers that the sooner they are pre-approved the better," Scott says. "It is not imperative to have a formal pre-approval in hand before seeing a home. However we do want to make sure that the Buyers are being realistic in their expectations and looking in the right price point." The CFPB agrees that getting preapproved early can help you spot credit issues in time to correct them.

What Crofton and Odenton sellers' agents expect to see with an offer

Sellers in Crofton, Odenton and the Fort Meade area want confidence that a buyer can close on time. A letter alone is not the end of it. On our side, Scott explains: "We confirm everything that is written on the letter with a phone call as well. This includes confirming that all of the income, assets, and credit have been checked out and when as well as making sure the proposed closing date in the contract is realistic."

So before you write an offer, make sure your letter:

• Comes from a reputable lender who will answer a call from the listing agent
• Reflects verified income, assets and credit, with recent dates
• Is still within its validity period
• Supports a settlement date your lender can actually meet

VA pre-approval at Fort Meade: COE, BAH as income and PCS timing

Get your Certificate of Eligibility (COE)

The VA calls the COE the first step in getting a VA-backed home loan: it confirms for your lender that you qualify for the benefit. Active-duty service members need a statement of service signed by their commander, adjutant or personnel officer, and veterans need their DD214. Your lender may be able to get your COE online through the VA's Web LGY system; requests by mail may take longer.

BAH can count as qualifying income

Fannie Mae's Selling Guide (B3-3.3-05, Military Income) says military allowances, including quarters' allowance, can be included as qualifying income as long as there is no indication the amount will be lowered or discontinued. The lender may count the full amount of monthly base pay and allowances, needs your most recent LES dated within 120 days of the note date, and requires a verbal verification of employment. Active-duty pay has no set minimum history requirement; National Guard and Reserve income needs a 12-month history. Ask your lender how your specific allowances will be treated.

PCS timing: the lender has to close on the seller's schedule

Speed matters as much as the letter. Scott has seen it firsthand: "We have VA buyers who get pre-approvals from some institutions that are not able to close the deal in time to make it work. Some veterans are loyal to certain banks that they have done business with. However some of those banks are slower than local banks and if the settlement date is not what the Seller is looking for, it can cost a buyer a deal." If you are PCSing to Fort Meade, ask any lender up front how quickly it can close a VA loan.

Related reading from The Scott Smolen Team

• Mortgage Broker vs. Bank: Which Is Better for Maryland Homebuyers?
• Avoid These Common Mortgage Shopping Mistakes