Why Get Pre-Approved For a Mortgage?

By: Emil Emilov

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Imagine the scenario. Months into your grueling house search, you have finally found The One. The location is right and the home and property fulfill your wish list to a T. You have already unpacked your boxes and stretched out on your expansive deck...in your imagination. The only thing standing between you and your dream home is the paperwork. And you've already pre-qualified for a mortgage, how hard could it be? All the stars are aligned and it's time to make an offer.

Not so fast. Another family has already begun envisioning their own version of life in your dream home. Dad is grilling steaks on your dream deck while the family dog pounces through your beautiful kitchen. The only difference between yourself and the competing buyer? The other family has been pre-approved for a home loan, and places an offer on the home right away.

The difference between being "pre-qualified" and "pre-approved" warrants clarification. First, it is important to understand that neither being pre-qualified or pre-approved guarantees financing for a home. Pre-qualification means that someone, perhaps your real estate agent or lender, has informally taken a look at your finances and deemed that you are likely a good candidate to qualify for a home loan of a certain amount. Bear in mind that pre-qualification is based on information you provide that has not been verified, and in no way guarantees that you will actually qualify for a loan in the amount specified. So if you are not guaranteed financing based on the amount for which you pre-qualify, of what use is being pre-qualified? Getting pre-qualified can be a good start for home buyers who have no idea of what price range they can afford. Having a general idea of the loan amount for which a home buyer may qualify helps real estate agents and home seekers narrow down the pool of potential properties significantly.

Getting pre-approved for a home loan takes the process a step further, and will give you a more accurate number to work with during your home search. Your credit report and income will be reviewed before you are pre-approved, giving the lender a more accurate impression of your financial status as compared to your word alone. Believe it or not, it is not uncommon for potential home buyers to stretch the truth about their financial status in order to be pre-qualified for a larger amount. Doing so only leads to wasted time and money looking at homes that are economically unfeasible, an undesirable scenario for all parties involved.

Shopping for a home is often a long, involved process. The last thing you want when you finally discover the home you want to purchase is to lose it to another, more prepared buyer. Being pre-approved gives you information about the maximum loan amount for which you will likely be approved, as well as the interest rate you can expect. Knowing a maximum loan amount and your probable interest rate allows you to calculate with more accuracy what your monthly mortgage payment would be for a particular home, a major factor in determining what home you can comfortably afford. Being pre-approved for a home loan can give you advantages in negotiation as well; sellers may be more inclined to accept your offer because of reduced uncertainty, and you may be able act quicker than another buyer since several steps of your application process have already been completed.

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