Learn the lingo behind your loan approval status.
When applying for a loan & working through the closing process to buy a home, it's important you know what the different documents mean that you are receiving from your lender.
The documents we will cover in this section are the Pre-Qualification Letter, Pre-Approval Letter, and the Loan Commitment Letter. Each of these letters indicate where you are in the loan process & what is needed to move forward.
What are the differences?
The Pre-Qualification Letter is a document that indicates conditional approval (i.e. approval under certain conditions). However, the lender has yet to verify the information given by the potential borrower. The borrower will provide basic information to the lender such as income, assets, debts, etc. The lender will calculate the amount the borrower should qualify for based on the information alone, without pulling credit or verifying the information with proper documentation (ex. the borrower states they make $80,000 per year, but the lender will not acquire & verify the paystubs). A pre-approval letter is not the same as a pre-qualification, because there is no verification of the information provided with a pre-qualification.
A pre-qualification is a conditional approval where the lender can only guarantee a loan will be provided if the unverified information the borrower has provided is true.
The Pre-Approval Letter is proof that the borrower is approved by the lender & lists the conditions they are approved for. The borrower will provide detailed information to the lender and proof of this information with proper documentation (ex. the borrower will provide income & verify the income with a paystub). The lender will begin underwriting the potential loan (i.e. reviewing all of the risks & qualifications) by pulling credit & reviewing the provided documents necessary for only pre-approval. Once the borrower has an accepted contract, the underwriting process will verify this & more information more extensively.
A pre-approval is an official approval in which the lender guarantees the borrower will be granted a loan based on verified information.
A Loan Commitment is a statement provided by the lender to the borrower after the borrower has an accepted contract & within a few days or weeks of closing. This document guarantees everything needed for the lender to provide funding (typically under the same terms you were approved for originally) has been received & approved.
However, commitment letters can be provided with additional "conditions" that need to be met. Meaning that there are still some stipulations yet to be fulfilled at this point. In these cases, the lender is still committed to funding a loan for the borrower, as long as those stipulations are met (ex. verification of employment the day before closing). This document is usually required to be provided by a certain date, spelled out in the sales contract. The loan commitment must be received by that date in order to abide by the terms of the contract.
The lender will sometimes provide a loan commitment with stipulations that remain unmet and need to be met before closing can occur. This will mean the commitment is subject to certain requirements being met.
For example, a loan commitment is issued subject to a clear appraisal
Or for example, a loan commitment is issued subject to the buyer providing certain documentation
A loan commitment is a guarantee the loan will be provided, possibly under the condition that some additional requirements be fulfilled.
If you'd like to learn more about when you should pursue pre-approval, read more about that here on our site.