FINANCING YOUR REAL ESTATE PURCHASE
What are the Differences between Pre-Qualification, Pre-Approval and Loan Commitment?
I always recommend that you get pre-approved for a mortgage before you look at homes to be sure you are looking in the appropriate price range and to strengthen your bargaining position when you locate the home you wish to buy. If your offer to a seller includes a letter from your lender indicating you already qualify for a loan, the seller will take you more seriously and you’ll have a competitive edge over other offers.
Differences between Pre-Qualification, Pre-Approval, Loan Commitment
It’s important to get pre-approved for a mortgage before you shop for a home, but sometimes the terminology is confusing. Do you understand the differences between the terms prequalified, pre-approval and loan commitment? The differences can affect your home buying transaction.
Loan pre-qualification does not typically include an analysis of your credit report or an in-depth look at your true ability to buy a home. You can be pre-qualified by a lender, by a real estate agent or you can do it yourself. The term means that someone has taken a general look at your income and expenses and plugged them in to a debt-to-income ratio formula. Pre-qualifying yourself before you start looking for a home gives you a general idea of the price range you a can afford. It will not nail-down an interest rate for you, and that factor and others affect the monthly payments a bank will allow you to make.
When you are pre-approved for a mortgage, it means a lender has looked closely at both your credit report and your income and determined that you qualify for a loan. The lender will tell you the maximum amount of loan it will make, which loan programs you qualify for, and will discuss the interest rates it will offer for different types of loans. When you’re pre-approved, you can go shopping for a home with confidence about your buying power, but it still isn’t a guarantee that the lender will approve the loan.
A lender issues a loan commitment after it has approved both the house and you. A home appraisal must meet the lender’s guidelines, which usually includes a stipulation that the home must appraise at or higher that the sales price.
Mortgage Do’s & Don’ts:
Do keep originals of all pay stubs, incoming bank statements (all the pages, even the ones that say “this page left blank intentionally”), and other important financial documentation.
Do notify your loan officer if you intend on receiving gift funds.
Do keep a “paper trail” of any and all deposits or balance transfers.
Do notify your loan officer of any employment changes (i.e. change of hours, employer, raises or promotions, etc.).
Do continue making all your monthly payments.
Do keep working at your current employer (yes, we’ve actually had people quit their jobs in the middle of the loan process!).
Do sign your tax return copies and provide every W2 and/or 1099 and/or K-1 that accompanies the return.
Do provide a bank statement showing your earnest money check or wire out as well as a statement showing location of down payment.
Don’t make any major purchases (car, furniture, appliances, etc.).
Don’t apply for new credit.
Don’t transfer credit card balances.
Don’t pay charge offs or collections (unless your loan officer says to).
Don’t close any credit card accounts.
Don’t increase your credit card debt.
Don’t open a new cell phone account – or any new accounts.