When you are considering purchasing a house you should contact a mortgage broker or bank to see what you qualify for first and obtain a pre-approval letter before making any offers on a house. The mortgage process can be very confusing. Knowing the differences between each stage will help you avoid unpleasant surprises when you are in the process of obtaining a mortgage loan.

Step 1: Pre-Qualification 
If you choose to finance the house purchase with a mortgage, you will need to get pre-qualified first. A “pre-qualification” is not as robust as a pre-approval, but it is a good first step to ensure you can purchase the house you desire. A pre-qualification is a pretty straightforward, simple check to see what you can afford based on your income/debt levels (debt-to-income ratio), assets, down payment, employment history, perceived credit score, and so on. After all, with a pre-qualification you are simply supplying estimates and your credit report probably has not yet been run (though it should be pulled early on in the process). That said, a pre-qualification is just a determination of what you would likely qualify for if you made an offer and applied for a house loan.

Step 2: Pre-Approval
A pre-approval, on the other hand, actually has legs. It is a written, conditional commitment from a bank or mortgage lender that says you are pre-approved for the mortgage financing in question. It comes only after filling out a loan application, supplying verified income, asset and employment documentation, bank statements, tax returns, running credit and underwriting the loan file. Acquiring a pre-approval shows the interested parties (sellers, agents) that you are a committed buyer. It will also show you how much house you can afford, not just an estimate. Once you provide all the required documentation and get the pre-approval letter from a bank or lender, it is typically valid for 60-90 days. Just note that things can change during that time, such as your credit score, so it is not 100% guaranteed. The pre-approval will state that you are qualified for the loan subject to verification of certain items. You can now search for your new house and stay within your budget.     

Step 3: Loan Commitment
Once you have found your house and are under contract, you then need to contact your bank to get the loan approval process going. During this process, the information on the application is verified (i.e. income, employment, assets, etc.), the property appraisal is ordered, and the title search is ordered. Once these activities are completed, the lender can then issue a loan commitment.  Do most pre-approvals result in loan commitments?  Assuming the lender is diligent during the pre-approval process, yes.  However, it is not uncommon for a consumer to receive a pre-approval and then find out later that the pre-approval was subject to conditions the consumer could not meet, thus prohibiting them from receiving the loan, or forcing them to accept a loan at a higher interest rate or lower loan amount. The word "Commitment" is used differently by many in this industry. Most commonly, it means a broker or lender accepts the loan for origination and underwriting or Board approval. Final Approval is given after all conditional underwriting conditions have been satisfied. Once those conditions are submitted, they are reviewed by the Processor, then sent to the Underwriter for "clear to close" aka final approval. If all the conditions are in fact met, everyone sets a close date.

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J. Graham Realty, LLC

Licensed Real Estate Agency In NJ & Florida