The Voice for Local Real Estate

Pre-Qualification vs. Pre-Approval

If you want to know about how much you can afford to spend on a house before looking, you can visit a local lender to talk with a loan officer/originator. In the pre-qualification process, the loan officer will ask for information about the money you have saved, your ability to make mortgage payments and your credit history. The loan officer will calculate how you can afford to spend each month on the mortgage payment.

At this point, your lender will have you fill out a form called a “uniform residential loan application.” The form includes information about your employment, income and expenses and assets and liabilities. In the process of applying for a mortgage, you will fill out and sign many forms. Make sure that you understand exactly what you are signing. You should read every document you sign. If you are not sure about something, ask questions.

By applying interest rates and loan programs, the loan officer will predict how much you can borrow. This step is important because it allows you to look more specifically at homes in your price range. A pre-qualification is not a guarantee that the lender will offer the loan.

Some lenders offer pre-approvals, which is a guarantee that if you make a purchase within a set time period and the home is valued for a certain amount, the lender will make the loan. Sometimes there are fees attached to these services.

A buyer’s offer accompanied by a pre-approval letter is more attractive to the seller. It indicates that a mortgage lender has reviewed your finances and that you are qualified to borrow the money subject to verification of the information you have provided. It gives the seller more confidence you can complete the purchase.

The pre-approval process informs you about types of loans available, interest rates, your estimated monthly note and the amount of money required for down payment and closing expenses. It shows you how much you can afford to spend on a home. A pre-approval letter is a good indication of your purchasing power and can be completed by a loan officer in a matter of minutes.

A pre-approval letter, however, is not the same as a loan commitment, which assures you of the loan at a particular rate of interest, if closed within the time specified. A commitment requires a complete loan application, verification of funds and income and a satisfactory credit report.

A loan officer can often qualify or approve you for a larger loan than you can afford on a monthly basis. You should be sure that the loan officer understands how much you can comfortably spend each month. If the monthly mortgage payments are too large, you are at a greater risk for missing payments or even foreclosure.

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