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Why pre-approval is worth the effort when house hunting

| April 28, 2014

Spring and summer are traditionally the peak seasons for purchasing a home. If you’ve been patiently waiting all winter to start house hunting, your first inclination might be to hire a real estate agent and jump right into looking for your perfect home.

While it’s certainly exciting to tour new homes and neighborhoods, a smarter first step is to find a mortgage lender.  Your lender can discuss your housing needs and goals, help you determine a budget, review the types of loans available, and decide if a pre-qualification or a pre-approval fits your situation.

The main difference between pre-qualification and pre-approval is in the verification and documentation of information. With the pre-qualification process, the information provided by the borrower is not verified whereas the pre-approval process typically requires verification and documentation of all information provided to the lender. A credit report will generally be pulled with either process.

To obtain pre-qualification, the borrower contacts a lender or visits a lending website and provides some basic financial information such as income, debt, assets, and amount of money available for down payment and closing costs. Based on this information, the lender provides   you with a general qualifying information letter.

The pre-approval process is more extensive and requires the completion of a mortgage loan application. The borrower provides copies of paychecks, bank statements, tax returns and other documentation to the lender.  While tedious, a pre-approval will determine how much house you can actually qualify to buy and help you avoid falling in love with a home you ultimately can’t afford.

The pre-approval letter will include the amount a buyer is qualified to borrow, as well as the loan officer’s contact information. It may also contain an estimated monthly payment.  A property selection and appraisal, along with comprehensive analysis of your credit, income, debts and property is required to provide a final loan approval.

Neither a pre-qualification nor pre-approval constitutes a loan approval or mortgage commitment or is binding on the lender. But, a pre-approval letter is preferable because it is more reliable and carries added weight.  The pre-approval letter also offers several distinct advantages, including:

  • You’ll know how much you qualify to borrow, which will help you determine a realistic price range to focus on in your house hunting efforts.  Also, your realtor will have confidence showing you homes in this price range.
  • It offers you more leverage with sellers. Sellers often prefer to negotiate with pre-approved buyers because they can be confident the buyer has the financing to close the transaction.
  • In a situation where there are close multiple offers, a pre-approval letter is an especially favorable point.

Your real estate agent will work harder for you. A pre-approval letter indicates to your real estate agent that you’re a well-qualified buyer who is serious about purchasing a home. The increased likelihood of a closed sale and its commission will motivate your agent.


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