As a real estate attorney, I hear it all the time! “The buyer of my downtown Chicago condominium is pre-approved”. That statement usually leads a real estate seller to a bunch of questions like “why does the condo buyer want a mortgage contingency?” or “since the homebuyer is pre-approved, they will get their loan, right?” Unfortunately, most pre-approval letters send one simple message.
The buyer’s loan is not yet approved, but we here at the mortgage company would sure like to make some money off of this transaction… if we can.
It’s that simple. In an industry that loves to use the word “approved”, the pre-approval letter presented to most home sellers in Chicagoland by most mortgage lenders really means “not approved“.
And, that’s okay. A pre-approval or pre-qualification letter is an essential step in a real estate transaction. It means that the buyer has taken an action step. The real estate purchaser actually picked up the phone and spoke to a loan officer about making a home mortgage loan. That loan officer, whether at a local bank or a loan broker, wants to do business with as many home buyers as possible. It is how the loan officer makes a living. The loan officer has a quick discussion with the potential purchaser and asks them about their income, asks if there are any credit issues, past foreclosures, other debt, and possibly a whole host of questions. If everything “sounds right”, the loan officer will issue a pre-approval. Unfortunately, what that loan officer really issued was a pre-qualification.
Now, there is an actual pre-approval process that some lenders offer and some real estate buyers might take advantage of. In those kinds of pre-approvals, the buyer actually submits proof of income and assets, like paystubs, bank statements, W2’s, and tax returns to the lender. The loan officer pulls the buyer’s credit, verifies information, and reviews an actual application in order to obtain a true lender pre-approval. That pre-approval is then usually going to be subject to getting a proper real estate contract, acceptable appraisal, keeping up a credit score or asset level, and finalizing the loan through underwriting. The trouble is, most real estate agents, home buyers, home sellers, and mortgage lenders in Chicagoland don’t really make a distinction between “pre-approved” and “pre-qualification” and so the two words are used interchangeably.
And, in the case of the proper pre-approval (let’s call it a “real pre-approval”), the loan has not actually gone through the underwriting process. That means that while a loan officer has checked things out, the loan is still not approved and is not guaranteed to be approved until it goes through the full underwriting process. And anything can happen in underwriting!
So, does a real pre-approval assure a home seller that the buyer is going to get the loan? No. It means that the likelihood is higher, but no home seller should rely on a pre-approval, even a real one, as a guarantee that a real estate buyer is going to qualify for financing.