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Difference Between Prequalification and Pre-approval?

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Mortgage prequalificaiton: a smart way to start

Mortgage prequalification is a simple assessment of whether your debt-to-income (DRI) ratio fits American Mortgage guidelines for home loans. It also provides an estimate of how much you may be able to borrow – and that’s a good step in your home-buying journey.

While your DTI number is informative, keep in mind that you could qualify to borrow more than you can afford to spend on your house payments when factoring in your other living expenses and needs, such as furnishing your new home and monthly bills.

Getting prequalified does not require a commitment from you or the bank. Prequalification is not an actual loan application, and prequalification does not factor in your credit history. So even if you do pre-qualify, having an unfavorable credit history may prevent you from actually getting the mortgage loan. If you have concerns about your credit history, talk to your loan originator right away to find out what options may be available to you.

When you become prequalified, you may ask the realtor or loan originator who assisted you to provide a letter stating how much you may be able to borrow. Give this letter to your real estate agent to show you are serious about taking the steps to buy a home.

You can seek prequalification online or by talking to a mortgage loan originator.

Pre-approval: making it official

Mortgage pre-approval involves the same steps as a mortgage application: You will provide detailed information about your income and assets, which will be reviewed by the lender’s underwriters. If approved, you’ll receive a commitment by the lender for a specific loan amount. When you apply for a mortgage, you are actually applying for credit to purchase a specific property.

Your pre-approval shows you have the resources to make the purchase, and it helps you act quickly when you find the right home. From the seller’s point of view, a pre-approved buyer is more attractive than prospective buyers who SAY they can get a loan, but have nothing to back up their offer. By proving you have the bank’s backing, your mortgage pre-approval can help you negotiate on price, and can serve as the deciding factor when sellers receive multiple bids.

A note on timing: Do not apply for a pre-approval until you are fairly certain you will make an offer on a home within the next 90 days. Unlike getting prequalified, a pre-approval involves requesting a copy of your credit history and examination of your application and other documents you provide. A pre-approval will show up as an inquiry on your credit report, and it is only good for a certain amount of time.

If you decide to proceed with the loan, you may also be required to pay an application fee and pre-pay for the home appraisal and other costs. An estimate of costs or fees to be paid at the mortgage closing will be determined at this stage of the process.

To get pre-approved, you’ll need to provide some personal information and financial documents including detailed proof of your income for the past two years. You can start your mortgage application by contacting a mortgage loan originator.

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