Are You PreApproved? The differences between pre-qualification, pre-approval and mortgage commitment
If you are just getting started in the hunt for a new home, it's important to know the
difference between pre-qualifying, pre-approval and a loan commitment. It is not enough to simply begin looking for the home of your dreams. It is critical that you determine the price range that you can afford, get qualified for a loan and understand all of the steps to assist you in securing that perfect property when you find it.
Pre-Qualification
Pre-qualification does not mean that you have been approved for a loan, but it is an important component of the home buying process. You have to know what you can afford before you look. Pre-qualification will save you time and ultimately money.
A mortgage professional can help you determine your qualification. You should candidly
discuss your financial situation with him or her and not withhold any information.
Most likely your mortgage consultant will want to know your yearly household income as well as
your assets and liabilities. If you can discuss your finances candidly and determine what
you can reasonably qualify for a loan, then no one's time will be wasted. Otherwise, your agent may end up being a tour guide, showing you beautiful houses that you will never be able to get a mortgage for rather than helping you find an appropriate property to make an offer on. However, pre-qualification doesn't mean that much to sellers. It is more of a tool to help potential buyers figure out their price range.
Pre-Approval
Pre-approval is a firmer commitment that is based on more information than pre-qualification. A mortgage broker or lender will need to do a thorough credit investigation and it is particularly important that you disclose all financial information that is requested. The amount that you are approved for will be the amount that the lender is committed to loan for the purchase of a house. Getting pre-approval may give you more bargaining power when you are negotiating the price of a home.
If the seller knows that you are approved for the loan already you may have more leverage.
In fact, it is a good idea to plan on getting pre-approved. Some real estate agents won't
waste their time showing homes to potential buyers who do not have a pre-approval, especially
in a hot market. However, pre-approval doesn't necessarily mean that you will ultimately get the loan.
The final approval will still depend on
verification on the information provided
and also approval of the home you wish to purchase.
Mortgage Commitment
A mortgage commitment is a letter that is issued by the lender that states that they will fund your mortgage. This letter may include details of your interest rate and the maximum amount of loan they will offer. This sort of commitment requires that both you and the house be approved. This means that the home will need to be appraised at the sale price or higher and must meet the lender's guidelines.
Regardless of what stage of home buying you are in, it is very important that you keep a few things in mind. Remember that just because you are approved for a large loan, does not necessarily mean that you should borrow at the upper limit of your loan approval. Homeownership involves more expenses than renting and some properties need more work than others. Make sure you leave a financial cushion for repairs and upgrades to your new home.
Once you get approved don't make any big changes to your finances. Changing jobs, banks and taking out other loans can lower your credit rating, change your debt-to-income ratio and ultimately keep you from getting the loan. Now is not the time to buy that new car, big screen television or to take an expensive vacation. The mortgage company may make one last credit check
even if you have a loan commitment. If you are educated and prepared, you may find that the home buying process is easy and stress free.
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