Prequalified, Preapproved or Underwritten: What Does Your Letter Mean?

Two mortgage letters can show the same loan amount even if the lenders did different work. One lender may have used the income you entered online. Another may have reviewed your pay statements and bank records and asked an underwriter to decide which income and funds can count. Before you rely on either letter for an offer, ask what the lender verified and what still needs review.

Prequalified vs. preapproved vs. underwritten

These are common ways lenders describe the review. The Consumer Financial Protection Bureau explains how lenders use the terms differently, so use each label as a starting point for a conversation.

Prequalified

A prequalification often gives you an estimated borrowing range based on the income, debts, and down payment you report. Some lenders check credit at this stage. Ask whether the lender verified the information it used, especially if you have variable income or expect to use funds from a gift. This can be a useful starting point while you set your budget.

Preapproved

A document-based preapproval may include a review of your credit report, qualifying income, monthly debts, and available funds. That work may be done by the loan team, and the team may also run automated underwriting. Ask which documents or electronic verifications the team reviewed and whether a lender underwriter issued a decision. Some lenders use the same label for a lighter review. See the CFPB's guide to getting a preapproval letter.

Underwritten preapproval

When a lender offers a preapproval reviewed by an underwriter, that person can evaluate the borrower file and issue a conditional decision before a property has been selected. Ask which parts of your file were accepted and request the list of remaining conditions. For one example of a lender-specific process, Rocket Mortgage describes an underwriter review of income, assets, and credit for its Verified Approval Letter. Ask your own lender what it offers for the program you are using.

A conditional approval can also come after you are under contract. Ask whether yours applies to the borrower file alone or includes review of the property. An updated pay statement, proof of gift funds, property valuation, title, insurance, or condo project review may still be needed, depending on the loan and home. The CFPB describes the documents and lender review that continue after an offer is accepted.

What an automated underwriting result tells you

An automated underwriting system (AUS) evaluates the information submitted for a loan scenario. Its result can guide the lender's review, and the report can show what still needs to be verified.

• Fannie Mae Desktop Underwriter (DU) can return an Approve/Eligible recommendation. The lender is responsible for the accuracy of the submitted data and for satisfying applicable verification messages and approval conditions. See Selling Guide section B3-2-01.
• Freddie Mac Loan Product Advisor (LPA) can return an Accept risk class on its Feedback Certificate. Freddie Mac sets out separate requirements for Accept mortgages, including applicable transaction and property requirements. See Seller/Servicer Guide section 5101.2 and the Loan Product Advisor overview.

Both results can help a lender move forward with a conventional loan file. The lender still makes its approval decision based on the verified file, the property, and any applicable lender requirements. Ask whether the lender has requirements beyond the agency guidance for the program or property you are considering.

For example, suppose a buyer's initial scenario includes overtime. A favorable automated result reflects the income entered. If the lender later verifies a lower amount of qualifying overtime, it needs to reassess the numbers. Ask whether the result you are relying on reflects the income and funds the lender has verified.

Five questions to ask about your letter

1. What information did you verify? Ask which income, employment, credit, debts, and funds the lender used, and what was based on estimates or still needs documentation.
2. Who reviewed my file and what decision did they make? Ask whether a loan team reviewed it, whether the lender ran an automated system, and whether a lender underwriter issued a conditional decision.
3. What assumptions does the letter use? Confirm the loan program, purchase price, loan amount, down payment, and estimated housing costs, including any HOA dues. Ask whether those assumptions fit the home you are considering.
4. What still has to clear before closing? Ask for the open borrower and property conditions, who needs to handle each one, and whether any lender-specific requirements apply to that property type.
5. When does the letter expire, and what would trigger a new review? Ask what happens if you change jobs, take on a new payment, change the source of your down payment, or choose a different type of home.

If you are gathering paperwork, start with my Southern California mortgage application guide. If you are comparing letters from different companies, use my guide to choosing a mortgage lender to compare their process, costs, and communication.

Before making an offer, ask me to walk through your letter. I can explain what has been reviewed and what still needs to happen for the home you are considering.