Prequalification, Preapproval & TBD Approval: What is the difference and why is it important to prospective home buyers?
If you are a first time home buyer, a step up buyer or a savvy investor, it’s important to understand your options when preparing your financing to make the strongest possible offer. It is especially important in a fast paced, competitive buyer’s market like the one we are in currently.
What Happens During Prequalification?
First, let’s define each of your three options. A Prequalification is when you speak with or submit a pre-application to a mortgage originator and they make a determination on your ability to qualify based on their own knowledge or experience from verbal or basic written information. Unfortunately, there is a very low barrier to entry into the mortgage origination profession and a wide range of skilled professionals you can come in contact with. Keep in mind, a prequalification has not been underwritten or scrutinized by anyone other than the commission-based salesperson.
What is a Preapproval?
Second, a Preapproval is when you have actually applied for a mortgage, supplied documentation and been underwritten by either an automated system (called Desktop Underwriter at Fannie Mae & Loan Product Advisor at Freddie Mac) or an actual underwriter via a manual underwrite. The preapproval is superior to a prequalification and will provide you with a faster process once you enter a contract to purchase a home, as well as less chance of your application being denied in processing.
What Does TBD Approval Mean?
Last, a TBD Approval is when you apply, supply documentation, go to underwriting review, receive a conditional approval letter from the lender, clear any conditions, and gain a loan commitment letter based only on the collateral and title review (appraisal and title underwriting.) The “TBD” aspect means “To Be Determined Property.” This is the most advantageous preparation you can take because the credit, income and asset portion of loan qualification is now cleared and certain for a 60 day period. After 60 days, the documentation provided will need to be updated and re-underwritten to meet timing standards of most mortgage lender’s underwriting guidelines.
Why does this matter to me as a potential homebuyer?
If it’s not already obvious, a prequalification is not worth the paper it’s written on. Forget this option entirely because it leaves you at risk of loan fallout and will not expedite the processing of your actual loan application, nor will it provide any competitive advantages when making an offer to a seller.
A preapproval is the gold standard in the industry and an absolute necessity. In fact, any Realtor worth working with will not show you property until you’ve vetted your qualifying ability and obtained a preapproval. Seller’s and listing agents will not consider an offer from a buyer without a preapproval accompanying the offer or bid and obtaining preapproval will enable you to incorporate faster timelines to close and remove any loan related contingencies or deadlines to strengthen your bid.
A true TBD Approval is more work, but costs nothing to obtain other than your time, and puts you in the driver seat when bidding against other competitive buyers. You’ll have certainty that your loan is approved and be able to waive all loan deadlines/contingencies thus eliminating risk to the seller. You’ll also be able to close faster and get the extra edge on other less prepared buyers who may be offering a similar price to the seller.
In conclusion, being as prepared as possible with your financing will eliminate uncertainty, provide you with peace of mind, put you in an advantageous position against competitive buyers and help you land the best overall deal in your upcoming home purchase.
“The early bird gets the worm!” – Anonymous
If this blog post is applicable and you want to take the next step, you can schedule a consultation or apply for preapproval directly with Justin Stearns below: