For many of us, buying a home represents one of the biggest financial transactions we'll ever make. While the homebuying process might seem intimidating, there are some simple steps that make it easier. One of the most important steps is what's known as pre-approval.
Pre-approval will help you immensely when you're searching for a home. It might even give you an edge on the competition once you're ready to make an offer. In a competitive market, some sellers won't even entertain offers from buyers unless they have a pre-approval letter in hand.
So what exactly does it mean to be pre-approved for a mortgage?
What It Means
To be pre-approved for a mortgage means that a bank or lender has investigated your credit history and determined that you would be a suitable candidate for a mortgage. (If you want to see where your credit currently stands, the free Credit Report Card grades your credit history on the basics and also provides two free credit scores.) Pre-approvals might only be good for a certain amount of time but they usually signify that a lender is ready and willing to lend you money. It's a big step in showing sellers that you are serious about buying a house and that your offer should be treated accordingly.
What It Involves
Getting pre-approved is a somewhat lengthy process. But at the end of it all you'll know whether you can buy a home or not. The process starts before you even find a home. First, you'll need to go to a lender and complete a mortgage application and provide documents related to your financial history. The bank or lender will then do a thorough investigation into your finances in order to determine how much money they are willing to loan you.
At the end of the pre-approval process, you should be given an exact loan amount. This allows you to look for homes at that price point or lower. At this point, you'll also have a good idea of the interest rate you'll be given at the end of the pre-approval process.
The real benefit of getting pre-approved is that when you find a place you'll be able to move quickly. Once you make an offer, you won't have to scramble for financing since you're pre-approved.
Pre-Qualified vs. Pre-Approved
You may have heard the term pre-qualified in the past and assumed that it was the same thing as being pre-approved. Although similar, they are actually two different things. Getting pre-qualified involves sitting down with a lender in order to get an idea of how much money you can borrow. But it is only informational.
You would supply the lender with data such as your income, assets and debts and the lender would give you an idea of how much you can borrow, what type of mortgage options there are, etc. A lot of people make the mistake of thinking that pre-qualified means pre-approved, but this is not the case. Getting pre-qualified doesn't mean the bank will loan you that amount, but it can give you an idea of how much you can expect to be given once you get pre-approved.
Those who are not sure if they are ready to buy a home may want to get pre-qualified, but it's not necessary to the mortgage process.
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