Loan Pre-Approval

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Getting pre-approved for a loan is a written letter from a lender. It states that you are qualified for the loan, stipulates how much the lender is willing to lend you and specifies the interest rate that you qualify for.

It is a vote of confidence from a lender that someone has investigated your credit history, income, and debts, and determined that they would consider financing your endeavors. A pre-approval letter makes you an attractive buyer in a competitive real estate market.

Pre-Qualification Versus Pre-Approval

Pre-qualification is when a lender takes a superficial view of your finances and gives you an estimated loan amount. They do not verify your financial information nor do they check your credit score. This is the first step to see how lenders view you, what kind of loan you may be approved for, and provides you a realistic overview of your budget. Unfortunately, pre-qualification is just a starting point and does not have any real weight.

Pre-approval involves filling out an application and authorizing a hard credit check. A soft credit check does not affect your credit score and is only visible to you. A hard credit check is a serious inquiry into your credit history with the intention of approving a new line of credit. These inquiries can negatively affect your credit score.

The lender will also assess your entire financial background including bank accounts, assets, debts, income, as well as past and current employment. They are evaluating how suitable you are to repay a loan. This investigation will determine your interest rate and loan amount.

Why Get Pre-Approved

A letter of pre-approval is normally used towards a mortgage. Though it is not required when house hunting, it is a useful tool to know what you can truly afford. This will help eliminate homes that may be out of your budget.  It will also speed up the search by only browsing properties in neighborhoods within your price range.

Moreover, real estate agents are suddenly more interested in working with you, and you can now approach a seller and demonstrate that you are a serious buyer. Realtors and sellers tend to bypass offers that do not have pre-approval. This is because there is a higher chance that the buyer will eventually withdraw because of a lack of financing.

Now that you are a serious buyer, you have a bit more power and room to negotiate. Sellers are more open to discussion about the asking price, including appliances in the price, or even covering closing costs with a serious buyer.

What Pre-Approval is Not

Unfortunately, pre-approval does not guarantee a loan. Pre-approval is a strong indication that your loan will be approved. However, several factors influence the final decision.

The next step after pre-approval is a formal evaluation by a loan underwriter.  He or she will verify all your documentation on your mortgage application and monitor any recent changes to your circumstances that may affect your finances. The underwriter will also ensure that you are eligible for the specific loan program that you are applying for.  The loan program has certain stipulations regarding the condition and valuation of the property you want to purchase. Once you pass the underwriting phase, you will have successfully and officially been approved for a mortgage.