The Difference between Pre-qualification and Pre-approval

When it comes to buying a home, pre-qualification and pre-approval are terms you need to understand. First, they can help save you from the disappointment in learning you don't qualify for the loan you need to purchase your dream house. Second, they can help differentiate you, in the eyes of the seller, from the crowd of other tire-kickers traipsing through the home.

Pre-qualification Letter

The simplest process is pre-qualification. All you, the potential buyer, need to do is obtain a letter from a lending institution stating that, based on the financial information you have provided regarding your monthly income and expenditure, the lender would extend a loan to you up to a particular limit to enable you to purchase a home. It is a simple, informal, and non-binding agreement that demonstrates to the seller that you are a serious buyer. There is no charge for a pre-qualification letter and it does not obligate you to do business with the lender that issued it.

Pre-approval Letter

Pre-approval is a more involved process. It delves deeper into your finances, but it's work that would need to be done anyway during the lender's loan approval process. Moreover, it has the added benefit of improving your standing with the home seller during the back-and-forth negotiations that usually take place in order to reach a mutually agreeable purchase price. A pre-approval letter will also bolster your own confidence if you are unsure whether you would be able to obtain a home loan. It will spell out the maximum loan the lender is willing to make, the loan programs you are qualified for - for example, VA, FHA, first-time homebuyer, energy-efficient homebuyer and others - and the current interest rates available. Before issuing a pre-approval letter, the lender will collect information about your credit rating, your assets and liabilities, and your employment. There may be a fee for a pre-approval letter.

Keep in mind that a pre-approval letter isn't the same as a loan commitment. A loan commitment can be made only after the lender knows the appraised value of the home you want to buy and a firm interest rate can be established.

So what should you do? If you're just setting out on your home-buying adventure, obtain a pre-qualification letter. It's time to obtain a pre-approval letter, however, when your search has narrowed down and you are certain you want to join the legions of happy homeowners. It will give you an important advantage.