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Pre-Qualification and Pre-Approval are a Must Before You Start Shopping for Homes


By Sadiya Anjum

Before you decide to shop for homes, you need to first determine exactly how much home you can afford and how much you are willing to pay. Your lender may qualify you for the maximum sum possible but this does not mean that you actually take on the whole loan amount. To know exactly how much home you can afford you should first pre-qualify and pre-approve yourself for a loan. This will give you a better idea when you start hunting for homes to buy.

There are different levels of approval that you have to go through before you finally obtain the loan. The first two steps include pre-qualification and pre-approval. These terms are often confused by people and hence there is a need to actually understand what they mean.

Pre-qualification is a preliminary step to determine how much loan you can afford to take on. A lender, your agent and even you can pre-qualify yourself. Determine your gross income (before taxes), assets, your liabilities (credit and other debts including obligations like alimony) and the amount of cash you have for down payment and other loan expenses. Use a mortgage calculator to determine your debt to income ratio to know how much loan you can afford. Alternatively a lender can do the calculations for you in a short period of time for no fee.

Pre-qualification is just a rough estimate of how much loan you can qualify for. The lender does not make any checks or inquiries and basically takes your word for what you have stated. This is by no means a guarantee for a loan but it is a good method to shop for lenders and compare rates.

Pre-approval is one step ahead and better than pre-qualification. Depending on the information you provide, a lender will conduct an income check and make some calls. He will pull out your credit report to check your history. It is an in-depth analysis of your financial status. Depending on this a lender may pre-approve you for a certain amount of loan valid for a certain period of time.

At this point the lender will tell you about the various mortgage programs that may be suitable for you. He should give you an estimate of closing costs/ loan expenses called the Good Faith Estimate. You have now attained approval to a certain extent and you can shop for homes more confidently.

But even with a pre-approval, sometimes loans are not approved later. This can be a huge problem when you have already made an offer on a home. Make sure you read the fine print on your pre-approval letter. Lenders may have certain terms and conditions. For instance, if there are unfavorable changes in your credit report then you may not be approved. Perhaps you did not make a payment on some credit card bill after having been pre-approved, this could make a huge impact on the lenderís decision.

Despite the risks, obtaining a pre-approval is the best way to go. You know exactly how much you can afford and will be able to shop for in that price range. It also gives you an edge during negotiations with the seller. If there is another buyer bidding for the property, you may have an advantage if you have been pre-approved and he has not been. Any seller would not prefer not to accept an offer from someone who is not sure of his financing situation. It also saves a lot of time once you have opened escrow and started the closing process.

You just have to make sure that you try and keep your financial status unchanged. Do not default on any other loans and do not make other huge purchases. Keep the fine print in mind and hopefully you will be approved for the loan once you have found your home.

Article Source: ChoiceOfHomes.com - Real Estate Listings Online

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