Finding your First Home can be a stressful experience. Finding the right mortgage loan for your family just adds to the anxiety. That is why it is so important to understand the Mortgage Process and The Difference between Mortgage Pre-Qualification and Mortgage Pre-Approval.
You’ll hear about two ways of estimating your borrowing power: Mortgage Pre-Qualification and Mortgage Pre-Approval. These terms appear to be similar, but are quite different. Not only do they cause confusion for home buyers, there seems to be many interpretations from those in the real estate and mortgage industry as well.
The real the difference between the two terms is that a Mortgage Pre-Qualification is based on verbal information provided by the buyer. With a Mortgage Pre-Approval, the buyer supplies written documentation of all information they claim to be true. Neither is a considered to be a mortgage commitment, nor a written mortgage guarantee. However, obtaining a Mortgage Pre-Approval Letter is more preferred than obtaining a Mortgage Pre-Qualification Letter. Remember…they are not the same thing.
Getting Pre-Qualified for A Mortgage
A Mortgage Pre-Qualification is just an estimate of how big of a house you can afford and how much money a lender might be willing to loan you. The best time to get Pre-Qualified for A Mortgage is right at the beginning of your home buying process, before you even start looking at houses.
You simply talk to a Mortgage Professional, probably on the phone, and verbally provide information on your income, your assets, debt, and your potential down payment amount. The loan officer will also ask for your social security number and permission to order a credit report. After the credit check is received, he will talk to you about your mortgage options and provide you with a ballpark figure, in writing, of how much he thinks you could afford for a monthly mortgage payment and how much house you can afford.
The Mortgage Pre-Qualification Letter might say something like: Congratulations, After reviewing your credit report, the income information and the down payment availability you have shared with us at this time; you are Pre-Qualified for a 30 year fixed rate mortgage loan in the amount of $__________ sufficient to purchase a single family residential property selling for up to $_______.
The Mortgage Pre-Qualification Letter will always include disclaimer information such as: This Mortgage Pre-Qualification is not a commitment to lend. It is contingent upon: Receipt of an acceptable appraisal of the property; Seller concessions of up to 6% of the sales price to be applied to your closing costs (if you need them); and something like Final review of your complete application package by our underwriter. In other words, we will give you a mortgage when we see that the information you told us about is correct and meets certain qualifying standards.
There should be no cost involved and there is no commitment on either side. This estimate is just helpful in helping you figure out if buying a home is a viable option, and if so, what your price range will probably be. Getting Pre-Qualified for a home loan is a good first step that will let you know if you should proceed to the Pre-Approval process.
Getting Pre-approved for a Mortgage
Mortgage Pre-Approval is the next big step. This process is much more involved. Basically, you are formally applying for the mortgage loan that will ultimately finance the purchase of your new home.
The mortgage application process involves providing documented evidence that will satisfy the underwriting criteria and guidelines for the type of mortgage loan you’ve discussed with your mortgage professional. Conventional, FHA, or USDA mortgages have different underwriting guidelines and specific qualifying criteria for verification of income, income qualifying ratios, verification of down payment, cash reserves after closing, credit scores and work history, among others.
The process is not quick and not necessarily easy. But, most REALTORS® will tell you that getting Mortgage Pre-Approval is the key to getting the home you want. Agents and Sellers will know you are serious about buying when it’s time to make an offer. And in today’s hot real estate market, a buyer may need to act fast. If the competing buyer has a Mortgage Pre-Approval in hand and you don’t, they win.
• Knowing exactly what type of home loan you can obtain will allow you to shop and negotiate with confidence. For example, you could inform a seller that you have Mortgage Pre-Approval and you are prepared to close as soon as the inspections are complete and the appraisal has been approved…less than 30 days.
Keep in mind; once the seller signs a Purchase contract, they have to take their home off the market. The ability to close quickly, because you have Mortgage Pre-Approval is one way to get a great deal.
• And just as important, you, the buyer, will be more relaxed in spending money to hire an Attorney for contract review, providing the earnest money deposit, hiring a home inspector to perform the home inspection, termite inspection, radon inspection plus any other required inspections and paying for the mortgage application and appraisal fee.
Why? You are concentrating on the home you have purchased, and not worrying about whether they are going to get a mortgage to buy this dream home. It’s already been done!
Only a Mortgage Underwriter Can Issue a Mortgage Pre-Approval
Loan Officers can not issue a valid Mortgage Pre-Approval Letter. A valid Mortgage Approval has been underwritten by an authorized underwriter (an underwriter is the final person that says your loan is approved). If an underwriter Pre-Approves your application upfront, issues you a valid Mortgage Pre-Approval Letter, all you have to do is find the home you want, have it inspected and appraised, and you should be able to close in less than a month.
That’s a big bargaining chip in today’s market.
Click Here for What Paperwork You Need for Mortgage Pre-Approval:
By law, the only fee that can be collected at this time is the cost of a credit report, so be sure to ask if the Mortgage Pre-Approval service is free. Once you have Mortgage Pre-approval, it’s time to go shopping.
Once You Have Mortgage Pre-Approval:
Do Not: become overdrawn in your checking account; make any large deposits to your deposit accounts without discussing it with your mortgage professional; apply for any new credit, make any large purchases with your credit cards, use your credit cards to pay for the home inspections and/or appraisal; fail to notify your Loan Officer of any change in your employment status.
• The lender will pull another credit report just prior to closing, Any inquiry or any new debt could drop your credit score and “kill’ your chances for a mortgage at the terms and conditions specified in the Mortgage Pre-Approval Letter.
• Overdrafts are a sign of “financial irresponsibility and large deposits will have to be explained and could delay your closing.
• Similarly, the lender will call your employer to verify that you are still employed. Changing jobs or a notice of pending lay-off could “kill” your application too!
The Spring inventory of good homes on the market is shrinking and prices are going up. Interest rates are positioned to go up too!
Call Me @ 860.945.9284 to discuss the right mortgage option for your family and to take advantage of my FREE Mortgage Pre-Approval service. I’m here to help.