Pre-approval for a loan isn't same as prequalified

Don't confuse the two. One gives you an estimate, the other guarantees the money.

Jim Deboth Special to the Orlando Sentinel November 13, 2005

Few things are more embarrassing or frustrating than picking out something you want to buy, taking it to the cashier and then discovering you don't have enough money -- or credit -- to pay for it. It's even worse when that "something" is a home.

One way to avoid the problem is to get pre-approved for your mortgage loan. This means your lender has verified all the information you provide -- salary, credit history, down payment amount, etc. -- and gives you a letter showing you are pre-approved for a loan up to a certain amount.

This is not the same as being prequalified, however, says Chantell Myers, a loan processor for Kimberly Financial Services, in Gurnee, Ill. Although some lenders hand out letters saying someone is prequalified, those letters usually are considered useless because they are based solely on the borrower's word rather than on verified fact.

No lender will loan you a dime until your information is verified. In fact, many real estate agents won't even show you a home until this is done because they don't want to waste their time showing houses they aren't sure you could afford to buy.

You might as well obtain the approval before you start house hunting.

To be pre-approved, you will have to back up everything you tell the lender: your credit history, pay stubs or W2 forms, bank statements, brokerage or investment accounts and other paperwork. If you are self-employed, the lender probably will want to see your past three tax returns.

If a large amount of money recently "appeared" in your bank account, the lender might want to know where it came from. If you say it was a gift from family, for example, you likely will have to provide a letter from the giver saying that it is a gift and not a loan.

If it was a loan, you will have to pay it back, which changes your debt load. Lenders also will want to know how large your down payment will be, how long you have been at your job, how long you have lived at your current residence, what your monthly bills are and so on.

The pre-approval "letter will state what the conditions are, or what's been verified," Myers adds.

The letter will say how much the lender is willing to loan you. But that doesn't mean you have to borrow the full amount. You should focus on the home you want to buy and the size of the monthly payment you comfortably can afford to make.

The letter also will tell you how long you have to access the money. With some companies, the letter is good for 120 days. For others, it is less.

"The biggest hang-up in getting pre-approved is usually the credit score -- the FICO. And that's based on the credit report," Myers says. If there are mistakes in your credit history, you have to ask for a correction. You have to deal with the credit-reporting agency and, sometimes, with the company that made the mistake. In any case, it can take 30 days to get a mistake corrected.

Because you can never be sure which of the three major credit reporting agencies a lender will use, it makes sense to check your reports with all three companies and make sure all three are accurate.

You are entitled to one free copy per year of your credit report from each of the reporting agencies. To order, visit annualcreditreport.com.

Once you are pre-approved, do not make any major purchases until after you sign the papers for the house, and try not to change jobs. Lenders sometimes will do a final credit check before the loan closes to see if you made any big-ticket purchases that would make a major change in your monthly bills. They also might check to see if your income has remained stable.