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Pre-Approval Versus Pre-Qualification: Is There A Difference?
What's the difference between someone who is "pre-approved" for a loan and
someone who is "pre-qualified?" Is one better than the other? And if so, how?
These questions arose from a letter I received and seemed worth pursuing --
after all, if one approach is better than the other, wouldn't that be helpful
to borrowers?
In general terms, the idea behind pre-qualifying is this: You're a home buyer.
You do not have enough money to buy for cash (do not be distressed, this makes
you absolutely normal). The result: Your ability to buy depends on your ability
to borrow, so it makes sense to speak with lenders before looking at houses to
check your mortgage power and consider which loan program might be best for you.
So, lender Jones offers to "pre-qualify" you while Lender Smith has a
"pre-approval" program. Which is better? Is there an a single definition for
each term or an objective difference between them?
I asked a number of real estate folks about this and the results were
interesting: There seemed to be three general areas of agreement:
"Pre-approval" is likely to be a more formal process which includes a
credit check and perhaps even an employment verification. "Pre-qualification"
is likely to be an estimate of borrowing power.
The definitions of each term are flexible: While a "yard" will be 36 inches
each and every time, the meaning of "pre-approval" and "pre-qualify" varies from place to place, lender to lender, and who you ask.
Neither a "pre-approval" nor a "pre-qualification" are seen as absolute
loan commitments. Lenders still need to look at property appraisals, verify
information, and in many cases, re-check credit before agreeing to make a loan.
If a pre-approval or pre-qualification is less than a full loan commitment, why
should buyers bother? Here's why:
By speaking with a lender you can get an informed idea of how much you can
afford, which homes are in your price range, and which loan programs might be
best for you. This is important information
On the basis of your meeting, the lender can provide a "pre-approval" or
"pre-qualification" letter suggesting in broad terms that you can likely
qualify for "x" financing dollars.
There will be a caveat saying that the letter does not represent an actual loan
commitment because the lender reserves the right to review the appraisal,
verify credit and employment information, and take such other steps as it feels
are necessary to reduce risk. Because they are less than absolute loan
commitments, such missives are often called "hand-holding" letters.
By pre-qualifying or getting pre-approved you demonstrate to brokers and
sellers that you're serious and that you have a good idea of what you can
afford. For sellers, an offer from someone who has pre-qualified or sought
pre-approval is to be preferred over an offer from someone who has never met
with a lender and thus has little idea of what might or might not be affordable.
Written by Peter Miller
Find Utah Homes for Sale: -- Logan Utah Homes
Homes in Utah
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