When thinking about purchasing a home, a responsible REALTOR® will recommend (or possibly require) that you speak to a mortgage lender before you even begin the homebuying process.
First, it’s important that you have an understanding of how much you can comfortably afford to spend on a home, what your monthly payments will be, what interest rate you qualify for, and how much you’ll be paying each month in mortgage payment and other fees, such as homeowner’s insurance and property taxes, etc. Only a reputable lender can truly answer those questions for you. Second, your offer will be taken more seriously and given sincere consideration by both the seller and their agent when accompanied by a pre-approval letter. Finally, our reputation as REALTORS® is directly linked to giving exemplary advice and representation to our clients and making sure you are protected every step of the way — this is one of the many ways that we work to protect you.
When speaking to a REALTOR® or to a mortgage lender, you may hear the terms “pre-qualification” and “pre-approval” used interchangeably, but in reality, there is a difference.
When you initially reach out to a mortgage lender and tell them that you think you are ready to buy a home, they will likely ask you to fill out a loan application — this is a completely normal request, and a good mortgage lender will not prequalify you without a completed loan application. This may also involve the lender asking you for financial documents, some of which you may consider private or sensitive information (for a list of the items you may be asked for, please click here); again, this is a standard request, even though it may seem as though the lender is asking you to share very personal financials.
PRE-QUALIFICATION: Pre-qualification refers to an initial discussion that you have with a mortgage lender in order to begin your homebuying process. It should involve the loan application and request for financial documentation described above and should also involve a discussion with the lender regarding your monthly payment, to make sure that the loan amount they are qualifying you for is one with which you are comfortable. The pre-qualification letter will likely state that further review of your financials, employment verification, and other documentation and/or information (as well as a contract on a home and a satisfactory appraisal) will be required for approval.
PRE-APPROVAL: Pre-approval takes the pre-qualification process a few steps further. In a true pre-approval scenario, the buyer provides the lender with additional information in order to fully approve to be fully approved, with the exception of a real estate contract on a home and the appraisal for that property. The loan application is put through the underwriting process and the buyer is completely approved (subject to change, if there is a loss of employment or a substantial change to the buyer’s credit). In short, a true pre-approval letter from a lender makes you a stronger candidate and allows the seller and their agent to see you as “more of a sure thing” in the homebuying process. In same cases — such as in a scenario where there are multiple offers on the same property, at the same time, a full pre-approval from a mortgage lender can be the reason you “win” the bidding war.