Prior to viewing properties and considering an offer, it is important that you begin a preliminary loan process with a lender. Not only will that allow you the opportunity to fine tune your price range with a loan officer but it will also give you an opportunity to have questions answered and review loan options.
There are two key preliminary approvals in the loan process. Pre-qualification AND pre-approval. Some people use the terms interchangeably, but there are important differences that every home buyer should understand.
Pre-Qualification
Pre-qualifying is just the first step. It gives you an idea of how much of a loan you’ll likely qualify for. Pre-qualification is based on data you submit to a lender, who will provide a ballpark estimate of how much you can borrow. Getting pre-qualified involves supplying a bank or lender with your overall financial picture, including your debt, income, and assets. The lender reviews everything and gives you an estimate of how much you can expect to borrow. Pre-qualification can be done over the phone or online, and there’s usually no cost involved. It’s quick, usually taking just one to three days to get a pre-qualification letter. Keep in mind that loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home. It’s based solely on the information you hand over to the lender, so it doesn’t mean much at all if you don’t provide accurate data.
Pre-Approval
Getting pre-approved is the next step, and it’s much more involved. You must complete an official mortgage application to get pre-approved, and you must supply the lender with all the necessary documentation to perform an extensive check on your financial background and current credit rating. The lender can pre-approve you for a mortgage up to a specified amount after reviewing your finances. You’ll also have a better idea of the interest rate you’ll be charged on the loan at this point, because this is often based in part on your credit score, and you might even be able to lock in an interest rate. Some lenders charge an application fee for pre-approval, which can amount to several hundred dollars.
You’ll receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. This obviously puts you at an advantage when you’re dealing with a seller, because he’ll know you’re one step closer to getting an actual mortgage.
Using a pre-approval over a pre-qualification is most useful when competing for a property with multiple offers OR when trying to close on a property quickly upon acceptance of a Contract to Purchase.
