There is often confusion particularly for first time buyers as
to several key terms. This post is to help new or first time buyers in the loan
process. “Pre-qualified” and “pre-approved” are usually two separate status's
in the home buying process. There’s also the final step which is the “loan
commitment.”
Pre-qualified is the very first step in
the mortgage process many people take. You supply the bank or credit union with
an overall financial picture including: income, debt, assets. This allows you
to discuss goals, needs, and wants with the mortgage lender. Of note this isn’t
a sure thing but instead an estimate if you will of what you could expect to be
approved for. This status doesn’t carry quite the same weight as the
pre-approved status. This is more of a rough estimate of what you might qualify
for through the bank or credit union.
Pre-approved is the
next step and tends to be a lot more involved. The potential home buyer fills
out an official mortgage application that typically involves a fee and provides
documentation whereby the lender does an extensive background on the individual
or couple. This typically includes a credit check that does ding your
credit. From this information and application the lender can give you a
specific amount for which you are approved for. The interest rate isn’t locked
in but you can get a better idea on what interest will be charged on the loan.
In some cases you can lock into a specific rate. The address of the property in
question is left blank until you find your new home.
With this approval
you receive a conditional commitment in writing for the exact loan amount
allowing you to look for a house at or below that price point. This is a
serious advantage when dealing with a potential seller. This could even
potentially prevent you from losing out to another offer as the seller knows
you are already approved. Getting pre-approved also allows you to move quickly
when you find your new home.
Loan commitment is issued by the lender
when you are approved for the house in question. A house inspection can
be conducted at your expense to determine what things need to be worked on
before the house is finalized. This typically happens after or in conjunction
to a house appraisal with approval resulting in at or above the agreed upon
price. If the agreed upon price is higher than the appraisal you have the
option of either paying the difference or asking the seller to reduce the
asking price. At this point your income and credit score will be checked again
to ensure nothing has changed since the initial approval. This is typically a
“soft” pull and doesn’t affect your credit. So make sure NOT to touch
your credit until the loan commitment process is over.
That said we got pre-qualified and pre-approved when looking
for our home last year. We were told we were approved for a 160k property at
roughly 4.6%. Our mortgage ended up being lower than that and the interest
right about what was quoted. Because we were pre-approved our loan went
through within a month of finding the house.
Of note be careful with how
much house you purchase. You don’t want to over commit. Consider too getting a
30 year note and paying off the house early. You never know when your financial
situation might change and that added buffer could be helpful.
Some questions to consider when buying a house:
What is your
household income?
What kind of monthly expenses do you already have?
What size and cost of a house are you looking for?
How much do
you have to put down?
Consider too this post on a checklist for buying a house.
What do you
think? Was this helpful? Leave a comment!
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