This week Coldwell Banker is writing a series of articles on First Time Home buying. You can find them at #firsthome on their corporate website. So, in conjunction with them I decided to write with them and give my take on the first time home buying experience as well. The first in their series is the question always comes up on what the difference is between a pre-qualification letter and a pre-approval letter in the offer process when buying a home. Which is better? Why one over the other?
The biggest difference between a pre-qualification letter and a pre-approval letter is verification of income and assets. When you call the mortgage lender and ask them to qualify you for a house they ask you a series of questions to establish if you are credit worthy and have the income to support the loan amount you are looking for. Part of the process is them taking your personal information and pulling your credit score to see if you have the necessary credit. If you have the credit then they base the approval on the information you provide them in terms of money for a down payment and income you state to make. Based on that, they put it into a system and generate a pre-qualification letter.
Now, a pre-approval letter is a step farther along in the process. here they may have pre underwritten you on the loan and have paystubs or tax returns to verify your income is what you stated and to ensure that there is nothing that would hinder you from qualifying for the loan you are looking for. It has taken out some of the questionable things from the loan process like income and verification of money down to qualify and has had an underwriter look at it preliminary. Neither one will guarantee you can purchase the home since there are other variables involved in the process; like appraisal, taxes and home owners insurance.
But a pre-approval letter has a significant amount of more weight than a pre-qualification letter and gives you a better leverage when negotiating a home. I know when i am presenting an offer to the seller i discuss the pre-qualification versus the pre-approval letter to see which one they have and to explain to my seller the advantages of one over the other. In multiple offer situations it is always better to have a pre-approval letter because you are farther along in the loan process and have a better understanding that they can be approved or the loan based on their income and money down. I have negotiated better with buyers on a pre-approval letter than i have on a pre-qualification letter because when I represent the buyer I am talking up the fact that my buyer is PRE-APPROVED. This means that the seller can rest assured that the buyer has qualified for the mortgage they are looking for because the mortgage lender has reviewed their paystubs and w-2's to ensure they can get the mortgage.
Another benefit to it is that the mortgage person can tell you if you can comfortably afford the payment or not and lower the approval letters to an amount that you are comfortable paying a month. Just because you are pre-approved for $300,000 you may not want to go that high based on the monthly payments. You may feel better going only $250,000. But at least you will know better what your monthly payment will be approximately before you go out and look at homes. it takes a little longer but it is better to know up front than to find out at the end of the process that the payment is greater than you want or you cannot qualify because what you told him and what the documents you provided can prove are two different things..... I prefer to err on the side of caution since it protects the buyer and minimizes their out of pocket expenses in cases where they could not get approved....
So, you are looking for a home. Start with getting a prequalification and ask them to do a pre-approval letter for you. If the mortgage lender says wait and see what you find insist on getting it up front. It could be the difference in moving into a home now or starting the process all over again 30 to 60 days later after you find out what you can actually qualify for based on your verifiable income.
Dave diCecco
Realtor/Broker
Coldwell Banker United
Cell:704-519-7895
ddicecco@cbunited.com
www.davedicecco.com
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