Getting pre-approved
for a loan at the earliest stages of the home buying process is
key – ideally before you even begin to shop around. It’s
important as well, to know the difference between pre-qualification
and pre-approval.
Getting pre-approved means that you are formally applying for
a loan. This involves getting all of your financial “ducks
in a row” so-to-speak. The lender will require you to provide
various documentation in regard to employment history, income,
assets, expenses, tax returns, etc. In addition, your credit history
will be evaluated. A pre-approval carries with it a written certification.
It’s important to note that obtaining pre-approval from
a lender does not preclude you from changing prospective lenders
if you choose. Nor is the approval an absolute guarantee from
the lender.
Pre-qualification, on the other hand, is not a certification but
merely an estimate given without any required documentation or
proof of your financial situation. The term simply means that
someone has taken a general look at your income and expenses and
does not take into consideration the interest rate you may qualify
for, as well as other factors. In short, it is an opinion. Conversely,
when you have been pre-approved for a mortgage, it means a lender
has looked closely at both your credit report and your income
and determined that you actually qualify for a loan. In addition,
the lender can tell you the maximum amount of the loan you may
obtain, various loan programs you qualify for, and can tell you
the interest available for the different types of loans.
A pre-approval letter from a
lender puts you in a more prepared — and advantageous —
position in the home buying process.
Here are 3 prime advantages:
| 1. |
Getting pre-approved
answers the question of “How much house can we afford?”
Many
buyers initially aim too high with their price range. Going
in knowing what you can afford will save you time, energy
and possible disappointment. You are then able to spend more
time fine-tuning your desires. You will launch your home search
knowing your parameters and that the properties you become
interested in are much more likely to be within reach. And
certainly, you will know the amount of the payments you will
be continually responsible for. |
| 2. |
Getting pre-approved benefits
the agent who is representing you.
An
agent who can zero in on your financial parameters more clearly
is a happy agent. In fact, many real estate agents won't begin
working with you if you haven't spoken to a lender. Agents
will want to know that you are qualified and ready to purchase
a home. It’s likely that they may work harder on your
behalf if they know you are serious about your purchase. A
pre-approval letter is the best way to show your clear intention. |
| 3. |
Getting pre-approved strengthens
your bargaining position with the seller.
This is perhaps the most important reason. If a seller is
looking at multiple offers and yours is the one that is presented
with a pre-approval letter, this can give you a tremendous
advantage. A prospective buyer without pre-approval is only
giving the seller an estimate of what they may
be able to borrow. Needless to say, a serious seller wants
a serious buyer. Of course, even when not in a multiple offer
situation, having this approval in hand is key in the eyes
of the seller. In short, pre-approval establishes both your
bargaining and purchasing power.
Also, your loan is likely to close faster.
|
A note about Loan Commitment...
A lender will issue a loan commitment after
you have found the home you would like to purchase. In other words,
in addition to approving you, it must also approve the property.
The property must undergo an appraisal which meet the lender's
guidelines. It must appraise very near the sales price —
at or higher. Also, if mortgage insurance will be needed, this
also must be approved.
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