Pre-Qualification vs. Pre-Approval
Ashley and Mike immediately fell in love with the updated home with a pool. They quickly made an offer and then called a lender. Unfortunately, they soon discovered that they couldn’t qualify for the home. They tried to find something else in their price range, but nothing compared to the house they fell in love with. If only they had talked to a lender before looking at houses…
One way to reduce stress during the process of home buying is to actually apply for a loan before finding a house. The loan agent assembles a credit package that includes a loan application, credit report, income and asset information, and supporting documentation. These documents are then submitted to determine if you will receive credit approval or denial.
Buyers who are pre-approved are taken more seriously than their pre-qualified counterparts. Pre-qualification is not a loan commitment from a lending institution; it is only a loan agent’s opinion that you will be able to obtain financing. Verifications are not usually made so formal approval is not issued. Pre-approval, on the other hand, signifies that the lender has taken the application through a rigorous procedure. So buyers with pre-approval status can basically write their own ticket.
Benefits of pre-approval:
1. If you make an offer on a home and then apply for a loan, you are at the lender’s mercy. He sets the interest rate and points, aware that you do not have time to shop around.
2. Understanding the breadth of your financial reach will save the time spent looking at houses you can’t afford.
3. Shopping for a loan allows you to settle on a house payment that fits your lifestyle. If you rely on your lender to tell you what you can afford, you may end up with a high mortgage payment. Most people can qualify for more than they would feel comfortable paying.
4. Having a pre-approval letter from a lender gives you an edge in a situation where multiple offers have been made on a house.
5. Pre-approved buyers can generally close escrow more quickly. Once you submit your credit package, most of the legwork has already been done.
Remember, neither pre-approval nor pre-qualification are absolute loan commitments. Lenders must still assess property appraisals, verify information, and, in many cases, verify credit before funding the loan.