What is a pre-approval, what is a pre-qualification, and what is a loan commitment letter? Why would one be better than the others?

For answers to these questions, we went to ask our two senior loan officers, Charles Demty and Mandie Sullivan, who are also our two leading buyers agents. We also asked all of our listing agents the same questions.

Pre-qualification is what you get when you ask a loan officer to give you a letter that says they believe you will qualify for a loan at $X amount. But here is the issue: the loan officer bases the pre-qualification only on what you say your credit score is, and what you say your income is… there is no verification done.

Preapproval is what you would get from that same loan officer AFTER giving them your back pay stubs, bank info, and letting them run a credit score. But there is no loan in place, and the loan officer has not actually placed you in a loan program and has not gained approval from the lender based on the hard evidence.

A commitment letter is what you get when you have been committed to a loan program and the loan has been approved. This is of course the strongest of the three. The loan is in place and your lender has committed to lending you the money.

Why do you care?

When you place an offer on a house, the seller and the listing agent may have other offers also on the table. Your offer, if accompanied by a commitment letter, will be a guaranty that you can actually purchase the house in question. This makes your offer strong, since you already have the loan in place. If you have a pre-approval, your offer is stronger than those with only a pre-qualification, but not as strong as one with a loan commitment letter. The thing is, your offer may be slightly lower than the others, but there is little or no risk of you not being able to gain financing for the purchase. If the seller is wise, this will weigh heavily in their decision, since taking the house off the market for offers that are not sure to be funded is a risk for the seller, and the seller’s agent.

Get a loan commitment letter before you place the offer on the table. Your odds of getting a better deal are greater.

Also, in these days of slow markets, many sellers don’t even want to show the house if the buyer does not already have at least a preapproval. Better, get a commitment letter now, and save yourself the trouble of shopping for houses you can not buy.

For more information, see our web site sections on making an offer, mortgage financing, and buyer financial considerations.