As you begin your home search you will certainly encounter a realtor or seller asking if you have been “pre-qualified” or “pre-approved.” Although some people use these terms interchangeably, they are very different.
A pre-qualification letter is a mortgage lender’s best guess on what they think you will qualify for based on the information you provide them. The catch is, this information is unverified, unsubstantiated, unchecked. The lender is not required to do any homework. The letter is basically yours for the asking, giving it little to no weight in today’s market.
When you are truly ready to begin your home search, the best use of your time is spent obtaining a pre-approval letter. The lender will take you through a due diligence process, verifying your ability to repay the loan. Be prepared to have your credit assessed, income and debt analyzed, and other contributing factors screened.
Once your pre-approval letter is granted, it is definitely a milestone achieved and cause for celebration. It announces to any seller or realtor that you will have no trouble obtaining a mortgage as long as the title clears and the house appraises for at least the selling price you and the seller agree to. The pre-approval letter essentially places you on equal footing with any cash buyer and gives evidence that you can close the deal.
Benefits of Pre-Approval Letter
- Any offer you submit will be taken into careful consideration.
- Realtors will take you seriously and work harder on your behalf. (In fact, some realtors choose only to work with pre-approved buyers)
- Your final mortgage application process will be much smoother since your financials have already been screened.
Limitations of the Pre-Approval Letter
While having a pre-approval letter gets you that much closer to buying a home, there are limitations.
- The pre-approval letter is not binding on the lending institution. If new information comes to light that may affect your application (you take on new debt, or lose a source of income, etc.), the lenders are not bound by the pre-approval.
- If you over-bid on a property, or it does not appraise, that could affect your pre-approved amount.
- Pre-approval letters typically carry time limits of 60 – 90 days. If your house hunting extends beyond the stated time, you will have to begin the process all over again.
Buying a home is no small feat. But starting with a pre-approval letter will greatly ease the process and provide a much smoother path to home ownership.
The Difference Between Pre-Qualified and Pre-Approval Letters
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