Oftentimes you may see the terms pre-qualification and pre-approval thrown around seemingly interchangeably. Understanding the difference between the two, however, is very important in the mortgage process.

Pre-qualification is generally faster than the pre-approval process, but by no means is it a replacement for pre-approval. In the pre-qualification process, you give the bank or lender your financial information; this includes your income, debt, and assets. After the bank or lender reviews this information, they are able to give you an estimate of a mortgage that you should be able to qualify for. This is only an estimate, it is subject to change, and it will get you nowhere in today's market, as it holds no guarantee. Its only real use, is to give you a very rough idea of a price range you may be able to afford. The pre-qualification process is not mandatory, and it can usually be done over the phone.

Pre-approval is the process of actually applying for a mortgage without a property determined. You fill out a standard mortgage application, and your lender will perform a credit check. The results of this pre-approval process (provided the lender likes what they see, and feels they can work with you) will be what's called a Good Faith Estimate. This document will give you an estimate of the amount that you are approved for, an approximate interest rate, loan type, and closing costs. This will allow you to search the market for a house in your price range, and can help you if you find a house you are interested in, because it shows the seller how serious you are about your purchase.

One common misconception about the pre-approval process is that it guarantees you a loan. This is not always true. Pre-approval only means that you are approved to get a loan unless something goes wrong. The lender still needs to appraise a house you are interested in purchasing before they can guarantee a loan, in order to make sure that the asking price is not greater than the actual market value. Don't start looking for a house until you have finished the pre-approval process! You don't want to waste your time looking at houses that you can't afford.

Another misconception is that loans are determined solely by your income. Loans are not offered depending only on how much you make, so if you were thinking you might get a nice sized loan due to your large paycheck you may want to think again. Loan amounts are calculated on many factors (approximately 30!) which are grouped into five main categories. These categories are Payment History, Outstanding Debt, Credit History, Types of Credit, and Pursuit of New Credit. You may want to consider checking your credit report, to see if there are any issues that may need to be straightened out before you apply for a loan.

If you have some money set aside for a down payment, this could be very helpful in the loan approval process, and help you save money on monthly payments. In some circumstances, a down payment may be required. Investment properties and vacation homes both require a minimum down payment of 20% for United States residents, and foreign nationals will need a down payment of at least 25% in order to get a loan in the United States.

In some circumstances, no matter how good your credit score is, banks will not offer loans. This applies to most condo communities in Central Florida, specifically condo-hotel units and condos in short term rental communities. If you're thinking about looking into a condo, make sure you meet with a financing expert prior to beginning your search.

All in all, getting fully approved for a loan should be the most important and first step in your home searching plans, and it will make the overall process easier on you.

Posted by Carlos German on


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First, congrats on the 30 under 30, it's a huge honor. Anyway, this post is good information for buyers as they need to fully understand just where in the process they are (a pre-qual letter is worth less than the paper it's printed on).

Posted by Alex Cortez on Sunday, August 1st, 2010 at 11:40pm

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