If you are buying a home with a loan, then you will have heard or will hear the terms pre-qualification or pre-approval letters before too much time has passed. These two concepts are different items but close to the same thing. In a pre-qualification, you will speak with the mortgage lender and describe to them your financial situation. They do not necessarily need your credit report for a pre-qualification and are in many cases able to do this process over the phone or internet. The pre-qualification gives the buyer information about how much they can expect to spend on a home, what the monthly rates will add up to, and if buying a home is the right plan for them.
With a pre-approval, the difference comes in that the lender performs a credit check to see the loan approval size of the borrower. The pre-approval letter is seen in many instances as a more substantial letter in that it reassures the seller that the buyer can procure lending from the mortgage provider who wrote the letter.
This brings up another important issue. The mortgage lender who writes the letter does not need to be the lender who provides the loan on the house. The buyer still has the option of shopping for the best rates and services with any licensed lender while negotiating for their home. During the contract offer phase, there will often be language to include authorized lenders of whom from the buyer must apply for a loan. Read your contracts carefully to know what your options are at this point in negotiations.
Many Realtors will require buyers to have a pre-approval or pre-qualification letter before they show a seller’s property. Asking for pre-approval is to protect the interests of the seller from buyers who may have no interest in purchasing the homes or not have the financial means to buy the home. Many times home showings require coordinations where sellers are expected to leave the house, accommodate pets, and make other arrangements, so it is essential to take their needs into account as well as the buyers when making these decisions.
In the end, neither letter is a guaranty of loan approval. The house itself will become part of the final loan application, and the lenders did not foresee all factors during the pre-approval process. It is best to be patient during this process and have as many options available as you are able in the instance that one of them falls through.