Christina Rordam: The difference between pre-approval and pre-qualification

“Back on Market.” Ever see those words in an online listing? As agents we dread those words as much as any buyer or seller because it means the contract we had didn’t pan out. Sometimes a buyer’s situation can change unexpectedly and due to no fault of their own. I’ve been selling Orlando real estate long enough to have had experiences such as these. Once in a very unique and sad case, a buyer of mine fell ill and was placed into hospice. For obvious reasons they were unable to close last minute and that home went “back on market.”

There are however a myriad scenarios in which buyers and sellers can prevent contracts from being cancelled after they have been executed. One of the best ways to be sure you are accepting an offer from a valid buyer is to ask for a pre-approval and not just a pre-qualification. Although ultimately the decision to approve a loan is made by the bank’s underwriters, it’s best to get some insurance up front that the buyer can in fact buy your home. A pre-approval is a good way to do that. Let’s take a minute to look at what a pre-approval means versus a pre-qualification.

1) More documentation

A pre-qualification is generally indicative of a more thoroughly documented purchaser. Jim Pandolfi, mortgage specialist with 35 years experience and former president of the Central Florida chapter of the Florida Association of Mortgage Brokers agrees. “A pre-approval means either myself or the lender has taken the time to review the purchaser’s income and assets, in addition to their credit,” he said. This means tax returns, W2s or W9s, bank statements, pay stubs and many times the specifics for a given property, which we’ll come back to later. This is all, of course, reviewed alongside the buyer’s credit report as pulled by the lender.

2) They are often property-specific

Now about those property-specific pre-approvals: It’s all about the ratios in the world of lending. So whereas one home may be priced at $400,000 with “X” amount in taxes, another home may have a much higher tax rate at the same price, which may disqualify the purchaser if they were already pushing the limits of what they could qualify for. This is an especially important point for neighborhoods such as Baldwin Park where there are regular taxes as well as a CDD tax and sometimes two HOAs. Any HOA amount that is required to be paid by the buyer will also need to be calculated into their pre-approval. While not every pre-approval addresses the subject property and their tax and HOA amounts specifically, some do, and all the better for the seller and buyer. If it doesn’t mention the home specifically, a seller or their agent can always ask for a pre-approval that does. And in Baldwin Park or any neighborhood like it with a CDD and sometimes multiple HOAs, it cant hurt to call the buyer’s lender to make absolutely sure they are qualifying with those things in mind.

3) A pre-approval is just more thorough overall

A pre-qualification generally means the potential borrower has given permission for the lender to pull and review their credit, and either stated their income, or perhaps given some pay stubs. So in short, a pre-qualification is less documentation and ultimately more room for unpleasant surprises. Can a seller accept an offer or allow their home to be shown based solely on a contract and pre-qualification letter? Yes. Just be sure to get a pre-approval in the next couple of days and double check with their lender that the buyer can qualify. Ultimately in real estate, as in life, we control the things we can and hope for the best on the rest. Entering into a contract with a qualified buyer is one of the things in which we can control certain elements to precipitate a positive outcome. One way to do that is to ask for a pre-approval.