What is the difference between getting pre-qualified for a loan, and approved for a loan?

What is loan approval?

Getting pre-qualified for a loan gives you an idea of how much you might qualify to borrow. You have not actually applied because you have not identified a property. This is more of a general conversation with the lender about your situation.

A mortgage lender could have only your word on your income, assets and liabilities. None of your information has been verified, the loan amount or term is in no way guaranteed. You may be given a pre-qualification letter that merely states you are likely to be approved for a mortgage. Getting a pre-qualification is generally very fast and you can even pre-qualify for a mortgage online in only a few minutes and it really means very little.

Getting pre-approved means that not only have you given the mortgage lender information on your income, assets, and liabilities, but your information has been checked and verified. The mortgage lender will usually have pulled your credit report to learn about your credit history and credit-worthiness.

At my Indiana office my loan officers are required to run the application through Fannie Mae’s Desktop Underwriter and our pre-approval states that FNMA has approved you.

Getting a pre-approval letter means that you are likely to be approved for a mortgage and also states the amount for which you may be approved. It carries much more weight than a pre-qualification letter.

It’s important to remember that you are not guaranteed to get a mortgage just because you are pre-approved or pre-qualified even if you are clear to close nothing is ever final in spite of what they call it. Even “loan commitment”
Would still have conditions for docs or funding conditions before you can get the keys or the deed is transferred or checks can be cashed.

In this business nothing is done until its done. I have had borrowers get fired from jobs or quit the day of closing or take on new debt that we were not told about. I even have had houses catch fire and flood just days before closing.
And a few times the sellers could not close because they had to bring money to the closing they did not have or had another house to sell that did not go through.  Anything can happen!

Many things can happen during the process—some lenders may give out pre-approval letters without actually verifying your information or a borrower may not give completely accurate information about their situation.
Often during the verification and documentation process new stipulations are created. For instance in documenting income it may be discovered that there is a 401k loan or a divorce decree may disclose other liabilities like child support or other undisclosed monthly payments that can change debt to income ratios.

The life of a loan transaction from the lenders perspective begins when a prospect decides to move forward and become a borrower by taking a full application. Over the phone we can usually conclude if someone has a chance. We have no application fee or charge to run credit so if they are serious it begins with authorization to do a basic credit check. Our reports are
very detailed and we always show the full report to our clients so they can see what we see.
We also try to collect as much income information and documentation as we can to help the client identify the right price range. We also talk about assets and where down payments or closing cost money is going to come from if it is needed. (We often have no cost options available and no down payment programs as well allow for gift funds etc)
Once a buyer finds a house and gets ready to make an offer we use the address and terms to process the credit, income and asset information through Fannie Mae’s desktop underwriting system.
We also use other Automatic Underwriting Systems (AUS)
Like Freddie Mac’s LP (Loan Prospector) and GUS ( Government Underwriting System)
We use DU because if it passes it it will usually pass the others. But LP or GUS might have different findings.

Loans are “graded” by Fannie DU as:

Underwriting Recommendation What It Means:

Approve/Eligible
Based on the data submitted, the loan is eligible for Fannie Mae’s limited waiver of certain mortgage eligibility and underwriting representations and warranties, and if all conditions have been met, the loan is eligible for delivering to Fannie Mae.

Approve/Ineligible
The loan is eligible for Fannie Mae’s limited waiver of certain mortgage eligibility and underwriting representations and warranties, and if all conditions have been met, the loan is eligible for delivering to Fannie Mae. However, the loan does not meet the eligibility requirements specified by Fannie Mae, FHA, or VA. An underwriter must determine if the condition that caused the ineligibility can be resolved or if the lender has a negotiated contract that allows the ineligible condition.

Eligible/Ineligible
Loans receiving EA-I/Eligible, EA-II/Eligible and EA-III/Eligible recommendations meet the Fannie Mae eligibility Requirements. Despite the borrower’s credit risk, EA expands eligibility to borrowers who would have otherwise been reliant on higher-cost nonprime products by offering more conventional financing.

Refer/Eligible The loan meets the Fannie Mae, FHA, or VA eligibility requirements. DU evaluated a combination of risk factors, including assets, each borrower’s credit history, each borrower’s employment status, the property type, and the purpose of the loan. Based on the data submitted, DU is not able to recommend approval for the loan.

Refer/Ineligible
The loan does not meet Fannie Mae, FHA, or VA eligibility requirements. DU evaluated a combination of risk factors, and based on the data submitted, the system is not able to recommend approval of the loan. In addition, the risk analysis did not take into consideration any additional credit risk that might be associated with the ineligibility condition.

Refer with Caution
DU evaluated a combination of risk factors, and based on the data submitted, the loan does not appear to meet the credit risk of loans that receive a Refer recommendation. This recommendation is not used for government loans.

Out of Scope
DU does not contain the rules or models that are necessary to underwrite the product, borrower, or type of loan submitted. Therefore, underwriting results may not be valid.

We only issue pre approvals to people who are “Approve/Eligible”

And when the purchase agreement is final and we check it for errors or missing information then we continue to process the loan getting the entire application signed and documented.
In my office we run our own fraud test and flood certification as well as geocode the property, we verify employment and phone numbers and addresses we are given, verify social security numbers and check with the IRS to make sure people filed their taxes. We order title and appraisals review them for errors or red flags
if all of that makes sense we can have our underwriters review the file for closing. They will review everything and can ask for additional documentation.
They will assign loans a status. Most start with “suspended” until compliance and basic qualification information is verified then if they are not denied they are approved with conditions or “clear to close” once a loan is clear to close our in office closer reviews all compliance information and request final documents. The final documents are prepared and sent to the title company who then sends us the settlement statement for approval and
then the loan is ready for signing .
Even at this late stage of the game there can be funding conditions but we wire the money (electronic transfer) to the title company. Once the funding conditions are met such as the buyer and or seller having their money if needed, signing everything (including a statement that nothing has changed)
Only then is the loan closed.

A good guide for loan officers having trouble with DU trying to understand what the code mean can be found here

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