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Tuesday, April 22, 2014

44. Home Buying: pre-qualified, pre-approved, and a loan commitment?

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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