Home loan pre-qualification is when you tell a lender some basic information, such as what your income is, how much money you have available for a down payment, and typically allow a review of your credit report. In return, they communicate to you their sense of what type of mortgage you may qualify for, how much money you might need to close and, and what terms might be offered to you. Note the word “might” frequently as during the pre-qualification process, no documentation of income or assets is provided by the borrower and no review of documents to determine qualification is conducted by the lender. Pre-qualification is a good starting point for you as a home buyer, at which time you can then determine if you would like to move forward with pre-approval, which is an essential step to being able to place an offer on a home.
Home loan Pre-Approval is the next progression after Pre-Qualification. In the pre-approval stage, income and asset documentation are fully reviewed and the credit report is vetted. During this stage, issues related to how your income may be structured, where your down payment funds are coming from, and how your credit score impacts your loan terms will be determined by your lender. Once all potential issues are addressed, your lender will issue a letter of pre-approval. The letter will indicate several key points:
In most markets, a seller will not accept an offer from a buyer without a pre-approval from a local lender indicating that the buyer can in fact obtain financing to purchase the home. The seller will want this assurance prior to removing their home from the market and avoid wasting valuable time if the buyer’s financing does not come through.
The #1 mistake most home shoppers make is looking for homes without being pre-approved. Doing this can result in touring homes that you don’t qualify to buy, scrambling to get an offer in when you find a place you like, and losing out on a potential home for not providing a pre-approval with your home.
Bottom line – There’s no such thing as “casually shopping.” If you’re looking online, driving by homes, and popping into open houses, then you are only “casually shopping” until you find a home that you would like to bid on and that’s when you need to be ready to make an offer. Pre-approvals are free, good for 60-90 days typically and easily updated. If you’re thinking about buying a home, get pre-approved first.
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