September 12th, 2017 12:26 PM by Jackie A. Graves, President
Ralph Waldo Emerson, American essayist and poet, once said that
the future belongs to those who prepare for it. This is sage advice for
homebuyers who need to lay the necessary groundwork to buy the home of their
proper preparation, many buyers get lulled into the mistaken notion that if a
lender pre-qualifies them
for a mortgage this means
that they have been pre-approved for a home loan. Unfortunately, there's a
world of difference between these two terms. If you've ever been confused by
the two, we'll bring you up to speed on how these terms differ – and why a
misunderstanding can mean disaster for borrowers.
pre-qualified is the initial step in the mortgage process, and it's generally
fairly simple. You supply a bank or lender with your overall financial picture,
including your debt, income and assets. After evaluating this information, a
lender can give you an idea of the mortgage amount for which you qualify.
Pre-qualification can be done over the phone or on the internet, and there is
usually no cost involved. Loan pre-qualification does not include
an analysis of your credit report or an in-depth look at your ability to
purchase a home.
The initial pre-qualification step allows you to discuss any goals
or needs you may have regarding your mortgage with your lender. At this point,
a lender can explain your various mortgage options and recommend the type that
might be best suited to your situation. (For more, see Mortgages: How Much Can You Afford?)
it's a quick procedure – and based only on the information you provide to the
lender – your pre-qualified amount is not a sure thing; it's just the amount
for which you might expect to be approved. For this reason, being a
pre-qualified buyer doesn't carry the same weight as being a pre-approved buyer
who has been more thoroughly investigated. (To read more, see 4 Steps to Attaining A Mortgage.)
pre-approved is the next step, and it tends to be much more involved. You'll
complete an official mortgage application (and usually pay an
application fee), then supply the lender with the necessary documentation to
perform an extensive check on your financial background and current credit rating.
(Typically at this stage, you will not have found a house yet, so any reference
to "property" on the application will be left blank). From this, the
lender can tell you the specific mortgage amount for which you are approved.
You'll also have a better idea of the interest rate you will be charged on the
loan and, in some cases, you might be able to lock in a specific rate.
pre-approval, you will receive a conditional commitment in writing for an exact
loan amount, allowing you to look for a home at or below that price
level. Obviously, this puts you at an advantage when dealing with a
potential seller, as he or she will know you're one step
closer to obtaining an actual mortgage.
The other advantage of completing both of these steps – pre-qualification and pre-approval
– before you start to look for a home is that you'll know in advance how much
you can afford. This way, you don't waste time with guessing or looking at
properties that are beyond your means. Getting pre-approved for a mortgage also
enables you to move quickly when you find the perfect place. When you make an
offer, it won't be contingent on obtaining financing, which can save you
valuable time. In a competitive market, this lets the seller know that your
offer is serious – and could prevent you from losing the home to another
potential buyer who already has financing arranged.
you have found the right house for you, you'll fill in the appropriate details
and your pre-approval will become a complete application.
final step in the process is what's called a "loan commitment,"
which is only issued by a bank when it has approved you, the borrower, and the
house in question. This means the home should be appraised at or
above the sales price. The bank may also require more information if the appraiser brings
up anything he or she feels should be investigated (i.e. structural problems,
accessibility issues, outstanding liens or litigation
in progress). Your income and credit profile will be checked once again to
ensure nothing has changed since the initial approval. (For more, see Understanding
A loan commitment letter is issued only
when the bank is certain it will lend, so the commitment date on your purchase
contract should be closer to closing than to the date of your offer. (The
seller can ask to see that letter as soon as the date has passed, so beware of
anyone who tries to put an early commitment date into your contract).
warned. Pre-approved and pre-qualified are not the same thing. Don't assume
that the bank will provide your loan until you have been pre-approved. The
mistake could cost you your new home, so before you meet with the banks, do
your homework by getting pre-approved. Another important way to prep for
getting a mortgage is researching interest rates using a tool like a mortgage
this could help you save thousands of dollars in interest over the life of your
mortgage and gives you some background knowledge when you meet with the banks.
Remember, the future belongs to those who prepare for it.
By Brian O'Connell - To view the original article click here