You just got off the phone with the lender that your real estate agent asked you to call. They said you were pre-qualified to purchase a home for $350,000. You were on the phone with them for less than ten minutes. Are you really approved? Can you really afford the home? Are you sure you know what you are doing?
Buying a home is the largest purchase you will make in your lifetime. It is something you will want to do once you have all of the facts and are comfortable with the professionals you have chosen to work for you. That's right, we work for you. You are the consumer. It is important that you take time to learn about the process, access information from potential lenders, friends and family and even the internet. Anything you learn that will help you understand the process better will enable you to make better decisions and save you time and money in pursuit of your mortgage.
There are three terms you need to be familiar with regarding your home purchase. You can be pre-qualified, pre-approved and you can receive a loan commitment. These terms get confused by consumers, real estate agents and lenders. Although these terms are all similar they each mean a different level of approval from a lender. This means you should know which of these you have when you make an offer on a home.
Pre-Qualification
You can be pre-qualified by your real estate agent a lender or you can do it yourself. When you are pre-qualified it means that someone has looked at your income and expenses and plugged them into a basic ration calculation and determined how much you can afford to pay for your new home. It has not been reviewed by an underwriter and in many cases your credit has not been reviewed. The lender will not be required to stand behind a pre-qualification. A pre-qualification is a good place to start but will not give you any specific guidance towards finding the right loan for the purchase of your home.
Pre-Approval
pre-approval means that a lender has looked closely are your income, assets and credit to determine the amount of loan your will qualify for. This is done by a lender. The lender will be able to tell you how much of a mortgage they will provide and tell you which programs you will be approved for. Since you will have specific programs that you can be approved for you can discuss interest rates and fees in detail.
A pre-approval will let you shop for your new home with confidence. It still does not guarantee that your loan will be approved. The lender will still have t appraise the property that you are purchasing and ensure the terms of the contract conforms with their guidelines. A pre-approval means the lender has taken more time to review your credit and financials. It allows them to give you better advice in selecting the right mortgage for you.
Loan Commitment
When a lender issues a loan commitment it means that they have approved you and the home. Most lenders will not issue a commitment until they have reviewed the home appraisal. If they do issue a commitment without reviewing the appraisal they will stipulate that the commitment is contingent on the review of the appraisal.
The lender will review more than just he appraisal. They will want to make sure the title report is accurate and that any required home inspections have satisfactory results. Some of the items that may require inspection are the well and septic field. The benefit of these inspections being held prior to the loan closing, are that the seller must fix any problems in order for you to close the loan.
Once you receive your loan commitment you will want to thoroughly read it to make sure you comply with all of the lenders requirements. You will also want to make sure that the terms offered are the ones that you applied for. Your loan commitment will also have a time limit. Since your credit profile can change, the lender will rely on the credit report for a certain period of time. Once that time expires they will require a new credit report. This could put you commitment at risk if you have made any credit purchases or possibly missed any payments since you applied for the loan.
Since the loan terminology varies from lender to lender, be sure to ask lenders what they mean when they offer a pre-approval. The terminology may also vary from loan officer to loan officer with the same lender. Ask the loan officer enough questions to ensure you understand what is going on.
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