Looking to buy a new home?
If you plan to apply for a mortgage - and most people are - it’s important to know the difference between pre-qualification and pre-approval, both of which are vital to having a lending institution determine that you are a good candidate to make mortgage payments.
There is a difference between the two. Pre-qualification means that a bank or other lending institution has evaluated your creditworthiness and has decided that you probably will be eligible for a loan up to a specified amount, according to the National Association of Realtors. A pre-qualification letter, however, is only approximate, and is not binding because it’s based solely on information the home buyer provides to the bank. What it does, however, if you’re honest about your current credit status, is give you an idea of how much house you can afford. Pre-qualification can be done by phone or through the Internet and is typically free, says Investopedia.
A mortgage pre-approval letter from the bank, on the other hand, states that you are creditworthy for a specific amount of money. It’s based not simply on the information you provide the bank, but from a review, by an underwriter, of your credit report, bank statements, salary, assets and financial obligations, says NAR.
Pre-approval requires filling out a mortgage application and providing the above documentation. Your pre-approval letter will also give you an idea of what your interest rate will be, adds Investopedia. A pre-approval letter requires an application fee.
Once you obtain a mortgage pre-approval letter, the only other thing you need to obtain your loan is the appraisal of the home you plan to buy.
In fact, a pre-approval letter can win a bid over cash, says NAR.
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