Table of Contents
What is Pre-Qualified? | What is Pre-Approval? | Documents Required for Pre-Approval
What does it mean to be Pre-Qualified?
A pre-qualification is a lender estimated purchase price qualification based solely on information provided to them by the home buyer, verbally.
Basically, the pre-qualification is a simple conversation with the home buyer where the lender determines an approximate purchase price range based only on what the home buyer discloses in that conversation.
What does it mean to be pre-approved?
A pre-approval is the next step after a pre-qualification where the lender determines a qualified purchase price based on documented verification of the buyer’s credit report, income, and assets.
The full pre-approval comprises a complete written loan application and actual verification of the home buyer’s income, asset and credit information.
Documented verification is the importance difference between pre-qualification and pre-approval. The lender pre-approval letter is therefore a much stronger document than a simple pre-qualification.
Before you spend countless hours showing properties to a prospective home buyer and preparing offers, it is recommended to ensure the buyer is fully pre-approved for their preferred purchase price range.
The pre-qualification is a good place to start when building the client relationship and introducing them to your trusted lender.
The initial consultation and discussion with a lender without the pressure of pulling credit can help them understand their approximate qualifications up front.
This initial pre-qualification can be a great educational experience for many first time home buyers and give them the confidence they need to take the next step and get pre-approved for mortgage financing.
Or, if something is identified as a potential issue, helps them to understand what they need to accomplish to be ready to buy in the future.
As a real estate agent, spend quality income producing time working with home buyers who are ready, willing, and able. It is best to identify early those who are either not qualified or not financially prepared to buy.
The best practice is for new prospects to speak with your preferred lender as early in the process as possible to get a feel for where they currently stand and what, if anything, needs to be done to prepare them for home ownership.
Your lender is your trusted partner in developing this relationship so you both work as a team to benefit the home buyer in pursuit of their goals.
Not all buyers are ready, willing, and able when you first establish your relationship with them. By partnering with your lender to guide them and advise them along their path to home ownership, you’ll both impress upon them how much you care about their dreams of home ownership.
Whether it takes several weeks, months or years, you will have a loyal home buyer who is grateful for your guidance, care, and support in helping them obtain home ownership.
Documents Typically Required for Full Pre-Approval
When your home buyer is ready to seek pre-approval, the following items are typically required for the lender:
- Most recent 2 paystubs if paid bi-weekly or semi-monthly, most recent 4 if paid weekly. Most recent end of month LES if the buyer is active duty military.
- Most recent 2 years W2s.
- If self-employed, buyer’s income is 25% or more commission, or the buyer has rental/income properties, then the last 2 years Federal Income Tax Returns with all schedules are required, both personal and business returns (if applicable).
- Most recent 2 months complete bank and investment account statements from whichever accounts the buyer intends to use for their down payment and/or reserves.
The next set of items are needed only if special circumstances apply:
- If the buyer owns other real estate, then the most recent monthly mortgage statement along with the tax, insurance, and HOA dues (if applicable) statements are required.
- Annual Social Security Award letter if using Social Security income.
- Monthly pension statement if using retirement income.
- Monthly VA disability income statement if receiving VA disability.
- Divorce decree if the buyer is paying or receiving alimony or child support.
- College transcripts if some or all of the buyer’s 2 year employment history was spent in school.
- DD214 if the buyer is prior service military and applying for VA financing.
This is not an all-inclusive list of items required but covers most transactions. Many buyers, if they are salaried employees, typically only need to provide paystubs, W2s, and bank statements to complete their pre-approval.
As advanced as technology is today, many of those items can be sufficiently verified through online services such as TheWorkNumber for income verification and online bank verification for assets.
It is best to submit a full pre-approval letter with any offers you make on behalf of a home buyer so that the sellers know your buyers are already fully credit approved for the loan.
Your lending partner should take the initiative to complete full buyer pre-approval so that you and your home buyer have the best chance of getting an accepted purchase agreement.
The pre-qualification is a good beginning and an excellent first step for most home buyers but the pre-approval is what is ultimately needed for home buyers to confidently purchase real estate in this market.
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