When it comes to financing a new home, people have a lot of questions. How much house can I afford? What are the prevailing interest rates? Is my credit standing going to help or hurt my chances of landing a loan?
One of the most important questions facing homebuyers is this: What is the difference between being pre-qualified for a home loan and being pre-approved for a loan? Unfortunately, home buyers often believe that these terms are used interchangeably.
Pre-qualification is simply an estimate of the size of the loan for which you might qualify, given an assessment of the financial information you supply to your lender. Usually, pre-qualification doesn't include hard and fast documentation, such as income verification and a credit report. A lender can provide you with a "ballpark estimate" of the amount and type of loan you might secure based on the information that you provide.
Pre-approval, however – while not an unconditional commitment on the part of the lender – is a firmer assurance from a lender that you are likely to receive financing. Why is this important? When a buyer decides to make an offer on a house, he or she will want to be reasonably certain that there is financing available to back up that offer.
A mortgage pre-approval is more involved than a pre-qualification. A prospective borrower must submit all of the same documentation necessary to secure actual approval for a loan – except for property-specific details such as a title search or home appraisal, both of which could be a potential barrier to final approval.
During the pre-approval process, a lender will order a credit report, ask to see employment verification (pay stubs) and tax information (W-2 forms), and expect to see bank statements. All of this information is subjected to the same underwriting process as a formal loan application would be, and the results can be leveraged as a pre-approval for financing when you make an offer on a house.
Being pre-approved for a mortgage is a very smart decision on the part of a prospective home buyer. Pre-approval can be the difference between rolling the dice on financing or having a pretty solid idea of the type of loan you will be able to secure. It can also make your offer more attractive to a seller.
Another benefit of pre-approval is that it can help inform your housing search, enabling you to zone in on the right market and housing prices so that you can search with greater confidence and comfort. If you're thinking of buying a home, talk to your lender today about getting pre-approved for the loan that could put you into the home of your dreams.
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