Loan Pre Approval Vs Pre Qualification
By Kurt Real Estate Nov 23, 2019
When preparing to buy a home, there is one crucial step every consumer takes before they begin to shop…checking their finances. Since buying a home is one of the largest purchases most people will make in their lifetime, they’ve probably been planning for years and know the exact dollar amount they have available for a down payment. But how much will a lender actually give? This is the more important question.
As discussed in previous blogs, we know this relies heavily on your creditworthiness, debt-to-income ratio and a slew of other financial factors. Thus, given the depth of this lending process, you’d think it would take more than a simple phone call to a lender to determine the hundreds of thousands of dollars they’re willing to lend you, right? …RIGHT!
There is a huge difference between getting pre-qualified for a loan and pre-approved. Most people who don’t know will simply give their bank a call, answer a couple of questions, and, in a matter of minutes, receive a letter stating that they are pre-qualified up to a certain amount. Unfortunately, the trouble with this is that the amount qualified is not an amount that is guaranteed. You may think you’re shopping with $500,000 from the bank, but when it comes time to open escrow and the lender goes to approve this loan amount, they may only approve you for $400,000. Now you have a $100,000 to somehow make up for or lose the home.
You may be asking yourself, why would lenders even offer this deceiving prequal letter? Pre-qualification can be a great step to take far before you actually plan to buy. Understanding your finances and getting an idea of what you could afford is just the start. Keep in mind, there is NO evaluation of your credit involved in obtaining this. As aforementioned, pre-qualification can be done very simply over the phone or online. It does not cost a dime and there is no in-depth evaluation of your finances.
On the other hand, shopping with a pre-approval letter is like shopping with cash. Getting pre-approved is far more in depth and should be done before you begin shopping for a new home. You’ll complete a mortgage application and supply the lender with necessary documentation regarding your financial background along with a thorough credit check. Once you receive pre-approval for a specified amount, you now have an exact number you need to shop within.
Before you even begin perusing the market, be sure to specify with your chosen lender that you wish to receive conditional loan approval and have that pre-approval letter ready for writing an offer!
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