Are you pre-approved? Pre-qualified? Do you have a commitment letter from your lender? At some point during your home search, you’ll likely be asked one of these questions. Pre-qualification, pre-approval and loan commitment are three very different stages, so knowing the difference will help you avoid surprises throughout home buying and financing process.
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What’s a Pre-Qualification?
In today’s competitive market, a pre-qualification has little weight. A borrower supplies their lender with an overall picture of their current finances. The lender then analyzes an amount a borrower may be able to qualify for. No credit report is pulled and there is no verification of any of the information provided by the borrower.
What’s a Pre-Approval?
In order to be approved for a loan, a lender must verify various aspects of your finances and the home you are purchasing. Typically lenders begin this process with a pre-approval.
To get a pre-approval the lender will run your credit score and compile a loan application with the information you provide regarding income, employment history, assets, etc. The lender will analyze this information and issue a decision on whether or not you are eligible for a loan. If you are qualified for a loan, the lender will issue you a pre-approval that states your qualification subject to verification of certain items, such as income and assets.
What’s a Loan Commitment?
A loan commitment takes the pre-approval process a few steps further (click here to see the pre-approval vs. loan commitment timeline). The lender verifies all of the borrower’s financial information via various documents, including tax returns, pay stubs and W-2’s. Once verification is complete, the lender can issue a loan commitment, which provides information pertaining to the loan the lender agrees to provide the borrower.
It indicates the amount of money to be loaned, the interest rate* for which the borrower qualifies, the type of loan and period of time for which the commitment is good. Essentially, a loan commitment means that your mortgage has been approved (pending appraisal) even prior to finding a home to purchase.
Why Get a Loan Commitment?
Though shopping for a home with a pre-approval is better than shopping without, a loan commitment gives you a consistent head start against other buyers who are just starting their home financing process.
A loan commitment allows you to:
- Present the best offer on a property. In multiple offer situations, a loan commitment shows that you are a serious buyer and are ready to purchase.
- Have peace of mind. You already have a reliable commitment from your lender for your purchase.
- Act quickly. Having your loan ready prior to finding a home will allow you to expedite the loan process, which is a benefit for all parties.
Existing home inventory is low going into the busiest homebuying season and mortgage rates are hovering near yearlong lows, creating conditions for a competitive buying market. A loan commitment allows you to present a bid with cash-offer power and the ability to stand out from other buyers.
Purchasing your first home this year? Download our Mortgage 101 Handbook, the ultimate guide of home buying and financing.
* This is a qualified rate not a locked rate, they are subject to change based on the market at the time you find your home to purchase.