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Pre-Qualification vs. Pre-Approval

October 31, 2007

By: Jim Oosterman
Melrose Bank

Is there a difference when applying for a mortgage?
You've made the decision to purchase a home. Now what? Purchasing a home is one of the largest decisions that you will make in your lifetime. It can be a rewarding experience, but it can also be one of your most stressful events. Much thought and research on your part must go into the process, from selecting the right home in the right location, to obtaining financing. Before you even begin looking at homes, it's a good idea to visit a lender to get pre-qualified and pre-approved. Because the terms sound so similar, many people mistakenly believe that being pre-qualified for a loan is the same as being pre-approved. Pre-qualification is the first step in the mortgage process, pre-approval is the second, and full approval is the third.

Pre-Qualification
Many real estate agents encourage their potential buyers to get pre-qualified before showing them homes. A pre-qualification provides a maximum amount a bank will likely lend you based on either an on-line application, telephone, or in-person conversation about your current income and expenses. This process requires you to provide information regarding your income, assets and liabilities. Since this information helps determine how much of a home you can afford, knowing that figure may save you time and disappointment when you begin your search. If a potential buyer is not ready yet to commit to purchasing a home, the pre-qualification process helps in making financial planning decisions for when the time is right. While pre-qualification is important, and often times extremely quick, keep in mind that the lender may not have verified all of the information, and a pre-qualification is not necessarily a loan commitment. For this reason, many people move right to a pre-approval.

Pre-Approval
Getting pre-approved helps the potential buyer make a stronger offer on a home, as the offer is not contingent upon obtaining financing. Pre-approval begins when the potential buyer meets with a mortgage lender and completes a full loan application. The lender will then obtain a credit report from all three credit reporting bureaus, document and verify all acceptable income and assets, and have the file approved by the lender's underwriter. At this point, the lender will issue you a Pre-Approval Commitment Letter. The lender will suggest loan programs that closely meet the potential buyer's needs. First time homebuyers may qualify for mortgage programs with little or no money down, while a repeat home buyer who has more equity may have other options such as a 15-year loan with lower interest rates. A pre-approval letter is given to the potential buyer. Upon making an offer, this letter lets the seller and real estate agent know that the offer is serious and that financing has been arranged.

Loan Commitment
After you have been pre-qualified and pre-approved, the final stage of this three-part process is the actual loan commitment. A lender will re-underwrite your loan after it has received information on both the house you want to purchase and your desired loan amount. Meeting the lender's guidelines is important. Price however is just one aspect of the home that a lender considers. There are several other items to be reviewed by the lender the before loan can close, such as an appraisal of the property, title search, updated credit report, and proof of homeowners insurance. The property's appraised value must come in at the same or higher than the agreed upon sales price. In certain areas, flood insurance may also be required.

Once all of these criteria have been met, and you have successfully navigated your way through the three phases of the mortgage process, you will be well on your way to a closing date and signing all of the paperwork involved in the purchase of your home. Congratulations!

James Oosterman is the Vice President of Melrose Bank. He can be reached by telephone 781-665-2500, online at melrosebank.com or on Facebook at facebook.com/MelroseBank.


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