Loans & Mortgages

Pre-Qualification, Pre-Approval, and What Underwriting Actually Checks

Sellers treat these three stages very differently, and only one of them means much.

Buyers use pre-qualification and pre-approval as if they mean the same thing. Sellers do not, and in a competitive market the difference decides which offers get taken seriously.

The three stages

Pre-qualification is a conversation. You tell a lender your income, debts and assets, and the lender tells you roughly what you might borrow. Nothing is verified. It takes minutes and is worth about what it costs.

Pre-approval involves an application. The lender pulls your credit, collects pay stubs, W-2s, tax returns and bank statements, and issues a letter stating an amount it is prepared to lend subject to conditions. This is what a seller wants attached to an offer.

Underwriting approval comes after you have a property under contract. An underwriter examines the whole file plus the appraisal and title work, and issues either a clear to close or a list of conditions.

Some lenders offer a stronger version of pre-approval, where underwriting reviews your file before you find a property. It takes longer up front and produces an offer that behaves closer to cash.

What underwriting looks at

Capacity. Can you carry the payment? The main measure is debt-to-income ratio, your monthly debt obligations divided by gross monthly income. Housing costs plus car loans, student loans, card minimums and child support all count. Utilities and groceries do not.

Credit. Score, payment history, and how you have handled credit over time. A single old delinquency with years of clean history behind it reads differently from a recent one.

Capital. Your down payment and your reserves. Underwriters want to see the money and want to know where it came from. Large recent deposits get questioned, because lenders need to know a deposit is not an undisclosed loan.

Collateral. The appraisal. If the property appraises below the contract price, the lender lends against the lower figure and you cover the gap, renegotiate, or walk if your contract lets you.

What derails a file after pre-approval

Pre-approval is conditional, and lenders re-verify before closing. Several ordinary decisions break the approval:

• Financing furniture or a car. New debt changes your DTI. Buyers do this between contract and closing more often than you would expect.
• Opening a credit card, including a store card offered at a checkout.
• Changing jobs, particularly from salaried employment to self-employment or commission-based pay.
• Large unexplained deposits into your accounts.
• Missing a payment on anything.
• Moving money between accounts without keeping the records that show what moved where.

The rule underwriters apply is that your file at closing should look like your file at approval. Ask your loan officer before making any financial change between contract and closing.

How much the letter should say

A pre-approval letter stating your maximum tells the seller exactly how much room you have. Many lenders will issue a letter for the offer amount instead, which is worth requesting.

Approval amount and affordability are also separate questions. Lenders assess your gross income against your reported debts. They do not see childcare costs, medical expenses, an older car, or how much you want to save. Buying at the top of your approval is a decision you make, not one the lender made for you.

Shopping without hurting your credit

Getting pre-approved by more than one lender is worth doing, since rate and fee quotes vary. Credit inquiries for the same loan type inside a short window count as a single event for scoring purposes, so several mortgage applications in a couple of weeks cost you roughly what one costs.

This article is general information about how consumer finance products work in the United States. It is not financial, tax or legal advice and is not a recommendation of any specific product or provider. Rules and pricing vary by state and by institution.