Mortgage 101: Pre-Qualification, Pre-Approval & Loan Commitment – What’s the Difference?

Posted by Laine Smith on 4/27/16 9:37 AM

Topics: Home Buying

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. 

Download: Mortgage 101 Handbook

* 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.

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