When it comes to buying a home, pre-approval and pre-qualification are important terms you need to understand. They can give you more buying power in the eyes of the seller and, help save you from the disappointment in learning you don't qualify for the loan you need to purchase your dream house.
A pre-qualification is the simplest process of the two. Getting pre-qualified for a mortgage helps give you an idea of how much you might qualify to borrow. It is also a simple, informal, and non-binding agreement that demonstrates to the seller that you are a serious buyer. But since you have not actually applied for a loan, and the lender only has your word on your credit, income, assets and liabilities, a home loan or mortgage amount is not guaranteed. With a pre-qualification, no information has been verified. If you receive a letter from the lender, it may only state that you are likely to be approved for a mortgage. A pre-qualification letter does not obligate you to do business with the lender that issued it.
A pre-approval is a more involved process. It has the added benefit of improving your standing with the home seller during the back-and-forth negotiations to reach a mutually agreeable purchase price. A loan application must be completed, which is required in order to be pre-qualified. The mortgage lender will review your income, debt, assets, and confirmed monies available for down payment and closing costs. A credit report will be run and the lender will then issue a loan approval letter to you based on their review of the information. The pre-approval letter will spell out the maximum loan the lender is willing to make, the loan programs you are qualified for - for example, VA, FHA, first-time homebuyer, and others - and the current interest rates available. Keep in mind that a pre-approval letter isn't the same as a loan commitment. A loan commitment can be made only after the lender knows the appraised value of the home you want to buy and a firm interest rate can be established.
In order to become Pre-Approved for a Home Loan
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