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Get Pre-Qualified and Pre-Approved

T o enhance your chances of having a problem free experience when purchasing your new home get pre-qualified and pre-approved for a mortgage loan prior to putting in an offer on a particular house.

What is pre-qualification?

Pre-qualifying for a mortgage loan means asking the lender of your choosing if you can qualify for a loan of your choice before you begin shopping for a home. The lender will give you an estimate of how much mortgage money you can borrow based on your credit report, income, expenses and long term debts. At this point, there are no fees, credit checks or income and employment verification.

Generally, your mortgage payment, home insurance and property taxes cannot exceed 28 percent of your pre-tax or gross monthly income. Your housing costs plus other major long-term debts, such as car payments, cannot exceed 36 percent of your pretax or gross monthly income. This is a guideline, a floor and it can and does deviate. It gives you an opportunity to get your finances in order if you don't meet the guidelines.

How is pre-qualifying different from pre-approval?

To pre-qualify, means exactly that; to find out if you can qualify. If you don't, then you will need time to get your finances in order so that you can qualify. If you do pass the pre-qualifying guidelines, then you can move on to pre-approval.

The pre-approval process starts with an application you fill out completely, listing your income, expenses and long term debts. The lender will verify your income and employment and current housing. The lender will also provide you with a 'good faith estimate' of closing costs and details of the loan you choose. When this all proves satisfactory your are pre-approved. You will know the amount of the mortgage they will give you, the down payment you will need and a 'good faith estimate' of closing costs associated with the mortgage loan.

Being pre-approved for a mortgage loan smoothes the entire transaction including the closing process. It can also help in negotiating the price and terms of the home you want to buy. It gives you more clout with the sellers because they are dealing with someone not only ready and willing, but able to purchase. With financing in place, you are in an excellent bargaining position, and can close the deal quickly.

Not all lenders charge fees for pre-approvals; some don't. Check this out up front, ask about fees before you start the pre-approval process.

Now, it's time to start shopping for your dream home. When you find it, the lender will have a property appraisal done, and pull another credit report. Since you are pre-approved this should all go like clockwork and you can set a closing date.

For a preview of what is included in a 'good faith estimate' See my article on closing.