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Home Mortgages

posted 05 July 2006
 
 

Planning Ahead:
Pre-Approved or Pre-Qualified Mortgages?


By Charles J. Kovaleski
 
In today’s home-buying world, working backwards has become commonplace when it comes to mortgages. No longer are potential homebuyers only searching around for the right house before they head to the bank for financing. In today’s real estate environment, it’s become much more advantageous for homebuyers in the market to start the loan-approval process long before they've found a house. But should you become pre-approved or pre-qualified? And what’s the difference between the two?

The question of which direction is best for you depends in part on how much time you want to invest in the process before finding your home. Here is a look at your options:

Pre-approved mortgages

Pre-approval means the lender has agreed to provide a mortgage up to a certain amount, even before a house has been selected.

Pre-approval usually involves completing a formal application, providing all the necessary documentation related to employment, credit standing and financial disposition and, in some cases, paying a fee.

Despite the time-consuming process, the effort usually pays off: A lender's pre-approval letter carries more weight with a seller than a pre-qualification letter. It's proof of your buying power on paper, which can give you an advantage when you're among several buyers pursuing a property.

Once you've been pre-approved, you'll know exactly how much you




can afford to pay for a home before you enter into a purchase agreement, and you're usually in a better position to negotiate with a home seller.

In some cases, pre-approval will allow you to lock in an interest rate, which means your lender will guarantee the rate on your loan even if market rates change before closing. Most lenders will allow you to lock your rate for 30 to 60 days, with the option to extend the rate-lock period for a fee.

A few things to remember about pre-approval:

  • The approval is usually good for a specified period of time

  • Approval is usually subject only to the borrower finding an acceptable property

  • Pre-approval does not mean you have a firm commitment;
        he loan is still subject to a sales contract and an acceptable appraisal

  • Make sure a lender's pre-qualification program is underwritten


  • Pre-qualified mortgages

    Being pre-qualified means that a lender has determined the maximum home price for which it will approve a loan for you, but does not specifically give you approval for a loan.

    The pre-qualifying process usually entails a 15-minute phone call with a lender, who—based on asking you some questions about your finances—offers an opinion about the loan amount you would be eligible to borrow. The lender doesn't ask for any supporting paperwork to confirm what you say, and the resulting opinion is non-binding.

    Still, pre-qualification has some advantages: You'll come away with an estimated monthly payment and a price range to shop based on the loan size. This information can be used as a guide as you begin the home buying process.

    A pre-qualification letter doesn't hold the weight that a pre-approval letter does, but it does indicate to a seller that a lender is likely to give you a loan of a certain amount if your financial data is verified.

    A few things to remember about pre-qualification:

  • The lender doesn't have to give you a loan if your financial and credit documentation doesn't pass the scrutiny of the lender's underwriter.
  • If a lender hasn't asked you for any financial documentation, it's a good bet that you have been pre-qualified, not pre-approved.


  • With either mortgage, remember not to divulge to a seller how much you have been pre-approved or pre-qualified for. Also, be sure to contact the lender if your financial circumstances change prior to closing, as it could have a bearing on your pre-qualified or pre-approved status.
     
     

    CHARLES J. KOVALESKI
    is president of Attorneys’ Title Insurance Fund, Inc., (The Fund) the leading title insurer in Florida and the sixth largest title insurance company in the country.  Acknowledged as the Florida residential real estate expert, The Fund has been in business for more than 50 years and supports a network of more than 6,000 attorney agents statewide who practice real estate law. The Fund, based in Orlando, Fla., underwrites more than 300,000 title insurance policies for owners and lenders in Florida every year.  For more information, visit www.MyRealEstateStory.com.
     
     
     
     
     
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