The home loan process can feel overwhelming and be difficult to understand. There are many real estate terms used in transactions. Both buyers and sellers find terms like “Pre-Qualification” and “Pre-Approval” often used interchangeably. Even some loan officers and real estate agents will use the terms incorrectly, so it’s no wonder buyers find themselves wondering how to proceed.
The first step in obtaining a home loan is to meet with a reputable lender and discuss your financial situation. Generally, you will need to provide them with current pay stubs, W2s, bank account statements and the last 2 years of your tax returns. If you have been divorced and/or have child support obligations or receive payments, your final court documentation will be requested as well.
A mortgage loan pre-qualification is basically an estimate of how much house you can afford and how much money a lender would be willing to loan you. It is best to get pre-qualified at the beginning of the process, before you even start looking at properties. Your lender will want to discuss your income, job stability, assets and debts. Once they have performed a basic review of your qualifications and discussed down payment options, they will issue a Pre-Qualification Letter to you as the potential buyer. This letter will identify the maximum monthly mortgage payment you could potentially afford, your down payment requirement and basic terms of a loan. This letter is only to provide you with an estimate, and is to help you figure out if buying a home is a viable option, and if so, what your ball-park price range would be.
A Pre-Approval is quite different. In this case, the lender collects ACTUAL information and proof of eligibility from you, and has it reviewed by their underwriter for approval. There may be a fee for the application process as well. A credit check will be run and your employment and financial history will be verified. Getting pre-approved means that you have a tentative commitment from a specific lender for mortgage funding. A Pre-Approval letter is almost like shopping with cash, with the only remaining piece of the puzzle being the property you are interested in buying. It is important to remember, however, that funding will only be given once the property appraisal, title search, and other verifications check out on the particular home you have chosen to buy.
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Neither of these letters are binding. You are always free to obtain a mortgage from a different lender. The application process will be much shorter once you find the right house if you do stick with the same lender though. If you need a reference for a GREAT lender, we are happy to refer you to the best in the business! Reach out to us anytime and we will point you in the right direction.