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.
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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.
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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.
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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.
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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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