The term "Pre-Approved" is sometimes used interchangeably with "Pre-Qualified" within the real estate industry however, there is a big difference between the two! First and foremost, being pre-qualified DOES NOT mean you can secure a loan nor is it an indication that you already have financing guaranteed. When you go to your bank or a mortgage broker and you discuss wanting to buy a home with them they may do a cursory look at your financial situation. This basic review is the loan officer's assessment on how much of a loan they THINK you can get given the limited information you have provided them. In short, it is a free consultation that gives you an idea of how much someone thinks you can afford.
Now, compare this to being pre-approved. A pre-approval is an in-depth look at your financial situation. Your income, credit rating, proof of income and assets, debt and so forth. The loan officer is looking to see if you actually qualify for a home loan and, how MUCH of a loan they are willing to give you. Sounds simple doesn't it? Realistically, it is. There is no complex difference between the two that requires an in depth explanation. Do a search on both terms and you will find at most a one page read if that.
To put it simply, pre-qualification gives you a general idea of what you can afford;Pre-Approval tells you exactly what you can afford based on what the financial institution is willing to lend you. I will caveat this with the fact that a Pre-Approval is NOT a guarantee but it is as close to one as you can get without going through the underwriting process. An institution that is willing to give you a pre-approval letter is basically saying that they have a high level of confidence that your loan application, when actually submitted, will be approved.
So if you are just thinking about buying a house and don't know what your price range is get pre-qualified. Almost any bank can do it on-line in minutes and there are a ton of sites out there that offer a no-obligation assessment. However, when you decide that you are ready to find the home of your dreams, it is now time to get pre-approved. This of course leads us to the next question, "why should I get pre-approved?"
"I got pre-qualified, I am sure I can get a loan." "I'll worry about that once I find the house I like after all, my bank pre-qualified me." "I know I can get a loan, I have excellent credit and no debt! No need to worry about getting pre-approved."
How many of the above have you thought of or heard? Personally, I consider the above excuses for not taking the time to get pre-approved. As a former Army leader I used to ask the question of my subordinates, "what is the maximum effective range of an excuse?" The answer is simple, "ZERO METERS!" So, ask yourself this question, "how valuable is my time and peace of mind?" If you said very valuable then getting pre-approved is the best option to pursue during your home search.
Buyers that get pre-approved reap the following benefits.
1. You know exactly how much you can get a loan for. This means you won't waste your time and effort looking at homes you can't afford.
2. You may find that you qualify for more than you thought. Be aware though that you may end up with a high mortgage payment. Most people can qualify for more than they feel comfortable paying so make sure you know how much you are willing to pay for a mortgage.
3. Pre-approval can provide you better financing terms. If you make an offer on a home and then apply for a loan, you are at the lender’s mercy. He sets the interest rate and points, aware that you do not have time to shop around. This is already done with a pre-approval which usually results in better terms and conditions for financing.
4. You have better leverage during negotiations. When multiple offers are in play, having a pre-approval letter from a lender gives you an edge and puts you at the top of the list when multiple offers have been made on a house.
5. Pre-approved buyers can generally close escrow more quickly. Once you submit your credit package, most of the legwork has already been done.
6. The agent you are working with will prioritize you if he/she has multiple clients. Most agents will agree that a client who took the time to get pre-approved is serious about buying a home and warrants some extra attention. Additionally, the chances for success are greatly improved with pre-approved clients.
7. Peace of mind. Buying a home is a significant event, knowing that you already have financing lined up removes a lot of that stress and makes the process much more enjoyable.
Bottom line: if you are seriously searching for a home or even an investment property, take the time to get pre-approved. You'll be thankful you did!