Pre-Approval vs. Pre-Qualification
A Pre-Approval presents a powerful tool for you toward the purchase of your new home, with minimal surprises and disappointments. It presents you as a “cash” buyer to the seller.
Anyone who wants to buy a home today should go to his or her lender first. The understanding of how much can be borrowed presently reduces the possibility of disappointment later. The lender can provide guidance as to how to prepare and position you on a home that is currently out of your reach.
A realistic understanding of how much of a loan you can reasonably expect to qualify for is a good step toward the goal of home-ownership and a letter of pre-approval can be a mechanism that makes that happen. There is a distinct difference between a letter of pre-qualification and a letter of pre-approval and it is important that you’re aware of this distinction.
Pre-Qualification means there have been loan calculations made that show how much you “may” be able to borrow. While pre-qualification can reduce the process time for home loans, can indicate how much house you can afford and can provide certain leverage in bargaining power, it doesn’t necessarily guarantee that such a loan will, in fact, be made by the lender.
Pre-Approval means that you actually have a loan waiting, subject only to finding the home and the home appraising at the sales price. The “pre-approval” letter represents an actual commitment on the part of the lender. In order to secure such a letter it is necessary to complete a formal loan application and pay the associated fees. Credit, salary and bond funds will be checked and if the loan is a good investment, the lender will issue a pre-approval letter, which provides a commitment for a limited period of time, subject to a satisfactory property appraisal and title search.
Pre-Approval – An Advantage
Applying for a loan and obtaining approval before finding a home to buy can be a distinct advantage. Pre-qualification is a procedure where you get an opinion from a mortgage loan officer about how much you qualify for. In the process, any obvious difficulties that might cause problems might be discovered. This process is always recommended but it doesn’t have the advantage of a pre-approval. Pre-approval requires a complete application with credit reports and verifications. The Mortgage Company will issue a commitment subject to a specific interest rate and points and a satisfactory appraisal when the property is identified. Time limits are usually placed on pre-approval commitments. It recommended to be ready to look at homes and make a decision after you receive your pre-approval commitment.
The advantages of being pre-approved are:
- Looking at the right-priced homes
- Avoiding disappointment in deciding on a home that you can’t afford
- Saving money with a seller whom is confident about taking their home off the market with buyers who have a definite loan commitment
- Closing more quickly. The lengthiest contingency is usually the mortgage approval.
- Minimizing the anxiety of not knowing whether or not you qualify.