Most real estate buyers have heard that they need to pre-qualify or be pre-approved for a mortgage if they’re looking to buy a property. These are two key steps in the mortgage application process. Some people use the terms interchangeably, but there are important differences that every homebuyer should understand.
Pre-qualification is the very first step to take if you are ready to start your new home search. It is a no-cost, no-commitment analysis. You will need to provide some basic information such as income, current monthly debts, and credit score, but typically you won’t need to provide any documentation.
Your lender will be able to determine an estimate of your maximum monthly mortgage payment and how much you can borrow. These aren’t concrete numbers. They are a quick determination of what you’d likely qualify for if you made an offer and applied for a home loan.
Pre-approval is a written, conditional commitment from a bank or mortgage lender that says you are pre-approved for the mortgage financing in question. It comes only after filling out a loan application, supplying verified income, asset, and employment documentation, and pulling your credit report. Once your information has been reviewed, a loan officer will provide you with a letter stating how much you are approved to borrow.
Having a pre-approval letter can give you a competitive edge against other buyers; it shows the seller you are serious and ready to buy.
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