Tips Of The Week

Mortgage Pre Approval

 

Pre-approval not to be confused with pre-qualifying means formally applying for a loan just as if you were obtaining any loan. This means doing the loan paperwork early (e.g., credit and employment history, income, assets, expenses, tax returns, and so on). When you’re pre-approved, you’ll have a commitment in advance from the lender to give you a specific loan at a locked interest rate. It also gives you a hands-down advantage in negotiating with the seller over someone who is estimating his or her "borrowing" profile.

Pre-qualifying, on the other hand, is informal and can be done fairly quickly — by telephone in many cases or e-mail. This process gives you an idea of whether you are likely to qualify for the loan you want, although the actual approval is not granted until all the paperwork is in, the facts you stated when pre-qualifying check out, and nothing inconsistent is uncovered.Many use the terms pre-qualification and pre-approval interchangeably. While both give some indication of whether or not a potential home buyer can obtain a mortgage for a certain amount, there are significant differences between the two, which are important for a potential home buyer to understand.

Understanding Mortgage Pre Approval

A pre-qualification for a mortgage is basically an opinion by a lender, provided as a letter or a certificate, that states that they believe a potential borrower will be able to qualify for a loan. The lender bases their opinion upon credit, employment, income, debt, and asset information provided by the potential borrower. In some cases, the lender will, with the potential borrower's permission, also pull the borrower's credit report.

A pre-qualification opinion is provided on the basis of unverified information provided by the potential borrower. Because of this, it does not guarantee that the borrower will actually obtain a loan. It simply states that it is "likely" that they will be able to obtain a loan should all of the provided information be satisfactorily verified. Obviously, a pre-qualification where the lender is allowed to pull credit is somewhat stronger, but there is still a substantial body of unverified information even if credit has been pulled.

A mortgage pre-qualification letter or certificate will typically state the maximum loan amount for which a borrower would qualify, at a given interest rate, for a given term (e.g., 30 years). It may also state the type of mortgage loan as well (e.g., fixed or adjustable). The letter or certificate will also include a disclaimer stating that this is subject to verification of credit, employment, income, and asset information, as well as a satisfactory property appraisal.

 

Understanding Mortgage Pre Approval

A pre-approval, on the other hand, is a much more rigorous process. In a pre-approval the same information is requested, but unlike a pre-qualification, the information is verified.

The disclaimers on a pre-approval are typically subject to satisfactory property appraisal and no meaningful changes in the borrower's financial position (for example, loss of job) or market conditions (for example, a sharp rise in interest rates).

A pre-approval may state that the individual is pre-approved for a certain type of loan at a particular rate over a particular term. The pre-approval may also be stated as a monthly payment amount, in which case some work needs to be done to back in to the purchase price of a home.

While a pre-approval is still not a guarantee of a loan, it is much more likely that a pre-approved home shopper will obtain a loan than a pre-qualified home shopper, or an individual who has neither.

Benefits of Pre-Qualification and/or Pre-Approval

There are many benefits to being pre-qualified or pre-approved for a mortgage. The first benefit, and probably the most fundamental benefit, is that the home shopper will know how much they can afford to spend on a house. In addition, many or most realtors will not work with a potential buyer or show them homes unless they are at least pre-qualified for a mortgage. They do not want to waste their own time showing houses that the buyer cannot afford, or going through the whole offer/acceptance process only to find out that the buyer cannot qualify for a loan.

Another major benefit of pre-qualification and pre-approval is that the potential buyer will be in a much stronger negotiating position if they should make an offer on a home. Selling realtors and individuals selling their home take the offer from a potential buyer who is pre-qualified much more seriously than an offer from someone who is not. They would also take the offer of a potential buyer who is pre-approved more seriously than the offer of someone who is simply pre-qualified. In each case, they have a higher degree of confidence that the buyer will be able to obtain the necessary mortgage financing to close the deal.

 

Real estate experts tell first-time home buyers that it's critical to apply for a loan before shopping for a home, and it's true; this is an essential first step. But do you know that it's far better to be preapproved for a loan than to be prequalified? There are more advantages to gaining preapproval than you would initially surmise. When the lender hands a borrower a preapproval letter, it means the borrower can:

• Save Time by Looking at the Right Homes 
  If your real estate agent is sending you automatic e-mail listings of available homes, you can ask her to change the parameters to more tightly encompass the selection of homes that you are qualified to buy. If you're not receiving e-mails from your agent, ask her to send them to you. Most MLS systems allow an agent to send clients much of the same data that agents receive. This way, you'll save time by checking out homes you can actually afford to buy instead of falling in love with pie in the sky.
• Spend More Time Examining the Right Homes 
  By decreasing the inventory of homes to those that fit your parameters, you can allot more time to thinking about all the little nuances each home has to offer. Lots of home buyers never move past the price point when sorting out their preferences, but now you can devote your energies to looking at the little things that matter to you most such as whether your SUV will pass through the overhead space in the garage or smash into the microbeam.
• Gain Confidence & Avoid Disillusionment
  Now when you find that perfect home, nobody can take it away from you by telling you that you do not qualify to buy it. You can minimize anxiety and remove last-minute loan surprises that could disqualify you. You'll sleep better at night knowing that the home you selected is yours. Moreover, you can tell your relatives and friends that the home you made an offer is definitely going to close and you will not "lose face" with anybody.
• Increase Bargaining & Negotiating Power
  Sellers will be more likely to immediately accept your offer, even if that offer is for less than list price, because you are giving the seller peace of mind that her home is sold. She can take her home off the market and place it into pending status with confidence.
• Enjoy a Faster Closing Period
  Because there is no window period while your loan application is processed, the lender can speed up the entire processing procedure. Appraisals can be ordered immediately. It's possible to shorten a 30-day closing to two or three weeks, which comes in handy if a seller needs to quickly move and can't decide which offer to accept. Yours will move to the front if you can accomplish the seller's need to quickly close.

Because mortgage approval is generally the longest contingency to satisfy in a purchase contract, it is to your advantage to obtain a preapproval letter as soon as you're ready to begin your search. Lenders will render a decision based on your complete loan application, employment verification and data from all three credit reports