What does the pre-approval process involve? How is it different from pre-qualification?”

Mortgage Pre-Approval Defined

Pre-approval is when a mortgage lender reviews your credit and financial situation to determine how much they are willing to lend you. Normally, you would do this before shopping for a home. The idea is to get a rough idea what you can afford, and then shop within those parameters. Later, after you’ve made an offer to buy a house, you would go back to the same lender for final approval.

The pre-approval process will actually determine two things. First, the lender will determine if you’re even qualified for a home loan. You must meet their minimum criteria for credit score, debt ratios, income, etc. If you meet these requirements, the lender will give you a maximum loan amount. They will also give you a pre-approval letter to use during the house-hunting process.

Getting pre-approved for a mortgage loan is not a guarantee. It does not obligate the lender in any way. You’ll face a secondary review process later on, in order to get your final approval. There’s a lot more underwriting involved with the final approval.

Don’t Let the Terminology Fool You

Pre-qualification — Through this process, you would provide the lender with very basic information about your financial situation. This would include your monthly income and debts. Based on this, the lender will give you a ballpark amount they might be willing to lend you. “Ballpark” is the key word here. It’s not a very in-depth process. In most cases, you can get pre-qualified without even submitting a mortgage application.

Pre-approval — This is a more in-depth (and more useful) version of pre-qualification. When you get pre-approved for a mortgage loan, the lender will actually start to verify your financial background. This is what sets it apart from pre-qualification. They will request a variety of documents from you, such as tax records and bank statements. They will also check your credit score. The pre-approval process gives you a more accurate idea of how much you can borrow. That’s why I recommend it so strongly.

Approval — This is the final approval by the lender. It takes place after you have chosen a home and made an offer. In order to reach this stage, you would need to give your mortgage company a copy of the purchase agreement. You’ll also go through an extensive underwriting process that could take up to 30 days. The lender will probably require a home appraisal as well.

How Pre-Approval Benefits You, as a Home Buyer

Pre-approval only makes sense when you think about it. You could spend days or weeks looking at houses in a certain price range, only to find out that you’re qualified for a lesser amount. What a waste of time. But when you start with the pre-approval, you’ll have a pretty good idea what you can afford — or what the lender says you can afford.

Here’s a more complete list of benefits:

Getting pre-approved for a mortgage helps you identify any problems you have (too much debt, a low credit score, etc.). The sooner you can find about these issues, the better. It gives you more time to correct them.

Real estate agents will be more willing to work with you. If you were an agent, would you spend hours out of your day to help someone who hadn’t spoken to a lender yet? I wouldn’t. This is why most agents will only work with buyers who have a pre-approval letter.

Sellers will take you seriously. Put yourself in the seller’s shoes for a moment. Imagine you get two offers from potential buyers. One has been pre-approved already and has a lender lined up. The other buyer hasn’t even spoken to a mortgage lender yet. If the offers were for the same amount, which one would you take? It’s sort of a no-brainer. This is especially important in an active market, where multiple offers are a reality.

Once you know how much the lender is willing to offer, you can shop within that price range. This is the sensible approach to house hunting.

As you can see, this process helps you in several ways. No, it’s not a commitment from the lender. You can’t get that until you’ve actually found a house. But it’s the next best thing. It gives you a pretty good idea what they’ll be willing to lend you, when the time comes. So you can shop accordingly.

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