There seems to be confusion by both Buyers and Sellers as well as some REALTORS® concerning the terminology of pre-qualified, pre-approved and loan commitment as it relates to mortgages. Often the terms are interchanged when discussing mortgages but they are distinctly different and can affect a real estate transaction.

Being Pre-Qualified does not usually include a review of your credit report or an in-depth look at your ability to buy a home. It usually means that a loans officer or mortgage broker has calculated a debt service ratio for you which involves a review of your income as well your monthly expenses. Based on this ratio a lender can pre-qualify you for a maximum mortgage. Being pre-qualified helps you determine the price range you can afford.

Pre-Approved for a mortgage means the mortgage company has done a credit review as well as looked at your income to determine whether you are qualified. The lender will indicate the maximum amount of financing they will provide as well as the interest rate and available programs. Although you are now pre-approved for a mortgage it doesn't mean they will approve the financing as other factors must be considered such as the property you wish to buy.

Loan commitment involves the approval of both you and the house you wish to purchase. Just because you think the house is a great buy does not mean the mortgage company will. The lender wants to ensure that the value is there in the property (appraisal) as well as how easily it will sell should foreclosure occur. Once the lender is satisfied it will issue a letter of commitment to you indicating the amount of the financing as well as other terms that may be applicable.

I hope this eliminates some of the confusion between the different terms.

Proudly selling Quinte Real Estate