It has been rightly said that the
future belongs to those who prepare for it. There is no advice better than this
for potential homebuyers who need to start preparing for the task of buying
their dream home. Without preparation, many potential buyers are in for a
disaster, as the list of things that can go wrong is endless.
Most buyers make the mistake of
using the terms, pre-qualified and pre-approved interchangeably.
Whereas, there
is a world of difference between these two. If you are also one of those who
are confused by these two terms and don’t know what means what, then don’t
worry. We’ll help you get up to speed on the difference between these two terms
and why a misunderstanding can spell DOOM for your dream of buying a home.
Pre-Qualified
Getting pre-qualified for a loan
is the first step of the mortgage process and is a fairly simple one. All you
need to do is supply a lender or a bank with your overall financial picture,
comprising of your income, assets and debt. The lender evaluates this
information and gives you a general idea of the loan amount for which you
qualify.
Pre-qualification is not a lengthy process and can be done over the
phone or even online and has no costs associated with it. In order to get
pre-qualified for a mortgage, analysis of your credit report and in-depth
analysis of your ability to purchase a home is not required.
Because it is a quick process
devoid of any legality and based solely on the information that you provide to
the banker/lender, your pre-qualified amount is not a sure thing. It’s just a
general idea that states you might be
eligible for a certain amount of loan.
‘Might’ is the keyword here. Being
pre-qualified for a mortgage doesn’t provide any guarantee. On the other hand,
a pre-approved buyer is the one who has been investigated thoroughly and
carries a surety that his mortgage will get approved for a certain sum.
Pre-Approved
Getting pre-approved is the
second step of the mortgage procedure and follows the pre-qualification stage.
Pre-approval is a more in-depth and detailed analysis of your financial
condition that requires you to fill up an official mortgage application and
sometimes also pay a certain amount of fee.
Once you complete the application
and submit it to the lender, the next step involves submitting the necessary
documents so that the lender can perform an extensive check on your current
credit rating and financial background.
After performing all the
necessary checks, the lender can tell you the exact amount of mortgage that you
can secure. The lender also provides you with a better picture of the interest
rate that will be charged on your mortgage and you might also be able to lock
in a specific rate in some cases.
With pre-approval, you get a
written conditional commitment for an exact loan amount that allows you to look
for homes within that price level. Moreover, a pre-approval provides you an
upper hand in your negotiations with a potential seller, as he will know that
you’re one step closer to securing a mortgage.
Another major advantage of
getting pre-approved before you start hunting homes is that you’ll know exactly
what kind of a house you can afford. Thus, you won’t waste your time in
guessing or looking at properties that are out of your budget.
For instance, if
you have been pre-approved for a mortgage of $300,000, you’ll look for homes
within that amount and not for a home that costs $500,000.
Getting pre-approved also enables
you to move quickly when you find your perfect home because the offer you make
won’t be dependent on obtaining financing and that saves valuable time.
A
pre-approval letter also makes sure that the seller knows your offer is genuine
and serious. A pre-approval letter basically prevents you from losing the home
to another potential buyer.
Conclusion
Pre-approved and pre-qualified are not the same things. Therefore, don’t just assume that a lender will provide you a loan until you get pre-approved.
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