The Best Option for a Serious Buyer: Pre-Qualification, Pre-Approval or Loan Commitment?

Posted by Laine Smith on 11/5/15 4:10 PM

At some point in your home shopping process, you will be asked if you have been "pre-approved", a commonly misunderstood home financing term. Knowing the difference between a pre-qualification, pre-approval and loan commitment will help you avoid surprises in the homebuying process.

Pre-Qualificaiton, Pre-Approval, Loan Commitment

What's a Pre-Qualification?

A pre-qualification is pretty much exactly what it sounds like: you may or may not be qualified for a mortgage. The process includes talking with a mortgage lender about your income, assets, debt, etc. Without any verification or credit check, the lender will give you an idea of what you could be approved to buy.

What's a Pre-Approval?

To get a pre-approval, your lender will run your credit score and compile a loan application with the information you provide regarding income, employment history, assets, etc. Your 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, your lender will issue a pre-approval stating your qualification for a mortgage subject to verification of certain items, such as income and assets. Some real estate agents require their clients to have a pre-approval before they will compile a purchase offer for them.

What's a Loan Commitment?

A loan commitment is the best option for a serious homebuyer, because it takes the pre-approval process even further. Your lender will ask for various documents from your loan application checklist to verify your financial information, including tax returns, pay stubs, bank statements and W-2's.

Once verification is completed, your lender can issue a loan commitment which provides information about the loan the lender has agreed to provide you, even prior to having a purchase property address. It indicates the amount of money being loaned, the interest rate that you are qualified for*, type of loan and period of time for which the commitment is good. 

Though shopping for a home with a pre-approval is better than shopping without, a loan commitment gives you a significant head start against other buyers, especially in a competitive housing market. A loan commitment allows homebuyers to:

  • Present the best offer on a property. In multiple offer situations, a loan commitment is just as good as a cash offer and shows that you are a serious buyer.
  • Have peace of mind because you 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. See below how the process differs between borrowers with a pre-approval and loan commitment.
Timeline of Pre-Approval vs. Loan Commitment

With interest rates still near historic lows and a low existing home supply, it's important to have all of your financial ducks in a row. Stand out against competing homebuyers with a loan commitment!

For more information about buying and financing a home, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers.

Download: Mortgage 101 Handbook

Get Pre-Approved

Subscribe to Email Updates