When buying a home, it is very important to be Pre-Approved for your mortgage in advance. The reasons for this vary from calculating affordability to presenting a stronger contract. The issue is that the definition of this Pre-Approval varies depending on the context in which it is used. This guide should help you understand what Sellers are asking for when they advertised "Pre-Approved Buyers Only".
The phrase "Pre-Approved" brings up a question of semantics. The best way to further this discussion is to define the terms Pre-Qualification and Pre-Approval.
Pre-Qualification is a process whereby the buyer's income, credit and assets are analyzed. It is essential that all of these factors are weighed to give you a legitimate chance of getting the loan approved. The findings in the Pre-Qualification will also help you and your Realtor decide the home prices to search in the MLS. This prevents falling in love with a house just to find up that is $50,000 out of your price range.
Pre-Approval is a step PAST what you see above. It is actually only available after your complete loan file is submitted to a lender. At this point the lender will underwrite the loan file and come back with a Conditional Approval - a.k.a. a Pre-Approval. This is only a Conditional Approval because there will be conditions that the lender places on the loan that must be met prior to closing. After these conditions are reviewed and signed off on by the Underwriter, the loan should have Final Approval or Commitment and be Cleared to Close.
A Pre-Qualification is very important. It is not a guarantee, though!
A Pre-Approval Letter is only available AFTER applying for a mortgage... so if your seller is requiring one, get your Mortgage Broker on the phone and get the process started before you put a contract on a home so you know your timing will work and ensure a smooth transaction.
To Learn More about this process and read more details on the process, please read Pre-Approval vs Pre-Qualification - a lesson in industry semantics
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David, good information. The Mortgage Company that I work for we actually have an approval that fall between you Pre-Approval and Final Approval. We call it a Buyers Edge and it is a full loan commitment that has gone through underwriting with all documents verified. The difference between it and your Final Approval is that there is no property yet so no appraisal can be done. So the commitment is based on a loan amount and not property specific.