Know the Difference Between Pre-Qualified vs. Pre-Approved
When searching for a home, you may feel lost when it comes to knowing just how much you will be able to afford. You don’t want to look for a home that is too far out of your price range, yet you also want to be able to know just how much you can spend before looking. In order to do this, most realtors expect to get a pre-approval letter from a mortgage lender before they will shop for houses with you. If you’re simply curious about how much home you can afford, you can call a lender and tell them you’d like to be pre-qualified. They will run some fast numbers and give you an estimated figure based on your stated income and credit.
The pre-qualifying process can sometimes take as little as five minutes, and is only an estimated total of what you can afford. In most cases a realtor will not show a pre-qualified buyer homes, simply because this figure is just an estimate and not based on real numbers. When you go to get pre-approved, you will be more involved in the process. The lender will run your credit score, find out how long you’ve been employed and what your salary is, and will also look at your total monthly debts. Your total debts can include car payments and credit card payments, to name a few. The lender then calculates something called a debt to income ratio. This ratio is essential in being
pre-approved for a mortgage.
Once a mortgage lender has decided on a pre-approved amount, they will issue a letter stating this fact. This letter basically means that the lender is willing to loan you a set amount for the purchase of a home. The letter is then faxed or mailed to your realtor so you can begin looking at houses. Once you get the pre-approved letter in hand, you can begin looking at homes and then the letter is usually given to the seller’s agent as well when you find a home you like. This letter shows the seller you are already approved for a home loan, at least for this set amount. It gives you much more leverage when it comes to house hunting because the seller feels confident in knowing that you will be able to obtain the loan and close on the home. It is a definite bargaining chip that being pre-qualified cannot give.
This is because prequalification just gives you an estimate based on what you’ve stated, while pre-approval gives you an exact amount based on real facts and figures. It is highly suggested that you only get a pre-approval if you are serious about looking for a home, because your credit will be pulled and you will be asked to sign several different things, including an actual loan application. In most cases the pre-approved amount is good for a certain number of days. Ask your lender for more details so you can be prepared and start looking for a house.