(Article by M.C. Smith from the San Antonio Express-News, 17 April 2005)

"Qualify" and "approve" are two words that buyers hope to hear when they're in the market for a house. Both imply that a buyer has met certain criteria and been granted authorization.

It's when they're saddled with a prefix, however, that things can get confusing. While they both happen before actual qualification and approval, "prequalify" and "preapproval" are not synonyms. However, consumers and mortgage and real estate professionals tend to use them interchangeably, and it can be confusing.

"It's unintentional on the industry's part," says Susan Stewart, president of SWBC Mortgage Corp. "If you went to 10 different companies you'd get 10 different letters, all with different language" about prequalification or preapproval.

"It's a constant problem for real estate agents," she says. "They have no idea whether the information is true."

A prequalification is a preliminary determination, so there is no commitment from the lender to fund the loan, according to homemortgagetalk.com. To prequalify for a loan, you give a lender information about your income, long-term debts and the down payment you have in mind, and you get a rough estimate of the type of loan and the amount you might qualify for.

It's an informal process in which the date you provide typically isn't verified, according to the Web site.

Prequalification is an old term, a leftover from the days when loan applications were reviewed based on fixed ratios, says Stewart. A loan officer may have looked at a credit report, but it was a subjective process in which any derogatory information may have been counterbalanced by the officer's opinion of mitigating factors.

"It was based on personal opinion and was extremely subjective," says Stewart. Prequalification often was conducted over the phone. The prospective borrower would be asked for the income, debts and amount of intended down payment. Nothing was confirmed. And the lender would send a letter that said something like: "If everything you said is right ..."

"Prequalification today isn't of any value," says Stewart. Those in the industry don't give a lot of credence to prequalification, she adds, since they don't know what it's based on.

A buyer can be prequalified and not get the loan, or be prequalified for a lesser amount, and then be approved for more once a formal review of the credit history, debts and income is conducted.

That's where preapproval comes in. It involves plenty of verification. It's a more thorough process in which the buyer submits a full mortgage loan application, the Web site explains.

Your credit will be checked and your employment verified. The prospective lender will review your credit report to check your payment history and debt. You'll be asked for documentation of your income and recent statements for all checking, savings or other asset accounts.

FICO scoring and automatic decision and undertaking engines have taken the subjective, human approach out of the equation, says Stewart. Your FICO score, a number usually between 300 and 850, tells lenders what kind of borrower you will likely be, based on your credit history. Lenders prefer borrowers with higher scores.

Preapproval happens with a mortgage representative, who will collect information and submit it to underwriting. "It gives you a really good picture of what's going to happen with your loan," she says.

Even though it's more involved than prequalification, preapproval is not a mortgage contract. "Lenders will still need to property appraisals, verify your information and potentially check your credit again before agreeing to make a loan," according to the Web site.

It's common for consumers to call for a cursory review of their financial situation and a ballpark estimate of what they might qualify for, then call back expecting to be loaned that amount, says Stewart. If you just want an idea, use an online calculator. When you're ready to look -- and seriously consider buying -- ask to be approved for a loan, she says.

How do you know if you're approved? "Ask, 'Has the loan been underwritten?'" says Stewart. If the answer is "yes," you're approved. You should receive a letter detailing the amount for which you've been approved, the required documentation you need to cement the loan and the length of time for which the offer is good.

Such approvals typically are good for 90 days or more, so long as the buyer doesn't make any changes to income and debt, such as quit a job or buy a car, she says.

Once the buyer has put a contract on a house, it's time to formalize that preliminary approval. With the groundwork laid, there's a good chance the loan will be approved, but it can still fall through if:

• It was subject to the sale of an existing home and that sale falls through completely.
• The buyer was planning to apply the money from the sale of an existing home to the new home and doesn't get as much as expected.
• The chose property doesn't appraise at the sales price.
• The property inspection requires repairs that the buyer isn't willing or can't afford to perform.
• The buyer wants to change the terms upon which the approval was based, and the new terms have different requirements that the buyer doesn't meet. Changing from a loan with a down payment to a 100 percent loan program, for example.

"All of those things have happened in the last two weeks," says Stewart. "It's not uncommon. It's a complicated process, and things crop up."