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Prequalification & Preapproval - Definition Needed

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Question: 
Will you explain the difference between a prequalification and a preapproval for HMDA, RESPA and OCC purposes?
Answer: 

This is from our Lending Manual (you can find it in the Banker Store):VIII. Pre-Qualification [Commentary to Section 203.2(b)#2 - page 7288]
A prequalification request is a request by a prospective loan applicant (other than a request for pre-approval) for a preliminary determination on whether the prospective applicant would likely qualify for credit under an institution’s standards or for a determination on the amount of credit for which the prospective applicant would likely qualify. Some institutions evaluate prequalification requests through a procedure that is separate from the institution’s normal loan application process; others use the same process. In either case, Regulation C does not require an institution to report prequalification requests on the HMDA/LAR, even though these requests may constitute applications under Regulation B for purposes of adverse action notices.

IX. Requests for Pre-approval [Commentary to Section 203.2(b)#3 - page 7288]A. To be a covered pre-approval program, the written commitment issued under the program must result from a full review of the creditworthiness of the applicant, including such verification of income, resources and other matters as is typically done by the institution as part of its normal credit evaluation program. In addition to conditions involving the identification of a suitable property and verification that no material change has occurred in the applicant’s financial condition or creditworthiness, the written commitment may be subject only to other conditions (unrelated to the financial condition or creditworthiness of the applicant) that the lender ordinarily attaches to a traditional home mortgage application approval. These conditions are limited to conditions such as requiring an acceptable title insurance binder or a certificate indicating clear termite inspection, and, in the case where the applicant plans to use the proceeds from the sale of the applicant’s present home to purchase a new home, a settlement statement showing adequate proceeds from the sale of the present home.

B. To be classified as a pre-approval request, the lender must issue a written commitment to the applicant, valid for a designated period of time, to extend a home purchase loan up to a specified amount. The written commitment may not be subject to conditions other than:

(i) Conditions that require the identification of a suitable property;

(ii) Conditions that require that no material change has occurred in the applicant’s financial condition or creditworthiness prior to closing; and

(iii) Limited conditions that are not related to the financial condition or creditworthiness of the applicant that the lender ordinarily attaches to a traditional home mortgage application (such as certification of a clear termite inspection). [Section 203.2(b)(2) - pages 7271 - 7272]


Now I'll paraphrase: a Prequalification is a "quick and dirty" decision that typically only uses what the borrower stated (no verifications) and a credit report. A Preapproval is a full verification of everything (other than the property, obviously) just like a "normal" underwriting. The lender issues a commitment letter backing up the decision to grant credit.

First published on BankersOnline.com 4/12/10

First published on 04/12/2010

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