Mortgage Pre-approval Vs. Prequalification - Know The Difference
Prequalfication - Pre-Approval for a mortgage
, is there a difference? When looking to purchase a home or condo, you will hear these terms used often. Know the difference now and save yourself time and a few headaches.Prequalification
Prequalification is an unofficial estimate of how much house you can afford. A loan officer will take your information on what your income and expenses are and formulate an educated guess about your ability to buy a home.
A lender usually will not run a credit report on you when considering a prequalification amount. They will calculate your debt-to-income ratio and write you a letter of prequalification stating how much you should be able to borrow. Getting prequalified usually won't cost you anything, but it doesn't hold much weight with sellers or lenders.
The prequalification does not require substantial information and doesn't include all your financial information. The main benefit of prequalification is getting a general idea of how much payment you can afford.
Pre-Approval
Pre-approval on the other hand really carries a lot of weight in the mortgage and real estate industry. In order to be pre-approved for a loan you must make an application with your preferred lender and provide them with documents such as tax returns, bank statements, and business licenses among others.
Lenders will analyze these and other information gained by calling your employer and pulling your credit report. (They may charge you for running a credit report, but that usually your only cost during pre-approval.) They will then produce a pre-approval letter that certifies that you have the resources to afford to buy a home for a certain amount.
The interest rate for the loan will usually be stated in the pre-approval letter for the amount you are borrowing. Sellers love buyers who are pre-approved because they have proof that the buyers have financial backing and are prepared to pay the required amount. In real estate markets, some sellers won't even consider offers from buyers without pre-approval letters.
Banks dealing with short sale and foreclosure offers generally will not accept and offer with proof of cash funds or a pre-approval letter.
In short, if you're in the preliminary stages of purchasing property, you may want to go to the internet, find a mortgage calculator with a financial institute and determine much you may qualify for. Once you are serious about purchasing, you should contact your lender and go shopping with a pre-approval.
by: Michael Byrne