If you’re looking at listed homes out of curiosity, loan pre-approval isn’t necessary. However, if you have decided to actually purchase a house, and are looking for one that meets your family’s needs, being pre-approved comes with important perks. In fact, real estate agents often ask prospective buyers whether they have lined up financing in order to gauge their intent to buy.
In this article, we’ll explain the difference between being pre-qualified for a mortgage loan and being pre-approved. Many people continue to confuse the two terms. You’ll also learn why the latter is important in the context of comparing lenders against one another. Lastly, we’ll present three additional reasons to seek a pre-approval letter from your lender.
Is Pre-Qualification The Same As Pre-Approval?
Being pre-qualified simply means a loan officer has determined that you can qualify for a loan of an approximate amount. The lender is not contractually obligated to lend you the money. It’s worth highlighting that you do not need to seek pre-qualification for a loan before you purchase a house. Those who do seek it do so to learn how much (approximately) they can borrow. It can often be done quickly over the phone without a credit check.
Being pre-approved means a loan officer has checked your credit, verified your employment status, and examined your finances (i.e. bank accounts, etc.). This typically requires an appointment during which you present several documents, such as your pay stubs and bank statements. The lender will determine how much they are willing to lend to you along with the terms of the loan. You’ll receive a letter stating these details.
Comparing Terms Between Potential Mortgage Lenders
The pre-approval letter is important because it helps you to compare lenders side by side. You’ll want to know how their respective interests rates and closing costs compare against each other. A half-point difference in the rate can mean tens of thousands of dollars paid in interest over the life of the loan.
A lot of people worry that seeking pre-approval from multiple mortgage lenders over a short period of time will have a negative effect on their credit scores. But realize that comparing lenders is common. Multiple inquiries from them is unlikely to lower your score.
Reason #1: Focus On Properties That Meet Your Budget
Once you have been pre-approved for a loan, you’ll know how much you can afford to spend on a home. This means you can tell your real estate agent to narrow the selection of homes you visit to include only those that meet your budget. You’ll save time, which allows you to spend more of it on properties you can afford. You’ll also avoid the frustration that comes with falling in love with the “perfect” home only to discover it’s too expensive.
Reason #2: Avoid Waiting For The Loan
Many buyers have lost opportunities to purchase desired homes because they were forced to wait for their lenders to approve and extend financing. Without pre-approval, escrow can take weeks to close. If the seller is unable or unwilling to wait that long, the buyer’s offer may be tossed aside for others.
Once you have been pre-approved for a loan, you can ask the mortgage lender to accelerate the process. It’s common to close escrow as quickly as a week and half.
Reason #3: More Attractive Offer To Sellers
Sellers prefer buyers who have been pre-approved for financing. The reason is because homebuying transactions are often derailed when financing falls through during escrow. This wastes the seller’s time. When a buyer has been pre-approved, there is more certainty that the transaction will be completed. For this reason, many sellers will gladly set aside higher offers, and accept those in which the buyer has already lined up financing. This means pre-approval can often be used as a bargaining tool.
Being pre-approved for a mortgage loan offers many advantages for homebuyers. When you decide you’re ready to buy a home, consider this to be a priority.
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