What is the difference between loan pre-approval and loan pre-qualification, and exactly how the difference affects the home buyer's ability to purchase her desired home?
Why are these concepts important and timely when considering buying real estate? Do you really even need to be pre-approved or pre-qualified by your lending institution in order to secure a home loan?
Although it is easy to get these terms confused, there is actually a huge difference that may seriously impact your ability to buy a home in the desired time-frame. Preparation often makes the difference.
Possessing a pre-qualification letter denotes a situation where the prospective buyer presents to the seller "a statement of ability to buy" based upon the income and assets that the buyer has presented to the lender. The lender simply pre-qualifies the buyer on his word, without any documents of proof that would otherwise be required for loan requirement. This action is usually a conversation-starter and gets the buyer pointed in a general purchasing direction. Realistically, it carries little weight in a serious offer to buy.
Loan pre-approval, however, denotes a situation where the lender has completed an exhaustive analysis of the prospective buyer to determine his actual ability to purchase a home at a certain pricing level. This "proof of ability to buy" is then offered to the seller along with her purchase offer. This pre-approval document actually empowers the prospective buyer with great negotiating power and communicates to the seller that the buyer's offer is a serious one and the lender has promised the money to the buyer.
A seller will typically weigh the validity of all offers put on the table from a variety of perspectives. The buyer's actual ability to buy is perhaps the most important variable.
We highly recommend that our buyer-clients get pre-approved by their lending institution before beginning their home search. Knowing exactly how much one can comfortably spend on a home reduces the potential frustration of looking at homes priced beyond one's means, thus leading to unnecessary disappointment and wasted time. Furthermore, it presents the buyer as the most attractive offerer, possessing the ability to move towards closing, especially when multiple offers are bought to a seller.
Loan pre-approval simply puts the prospective home buyer in the best possible position to submit an attractive, timely offer that will be most pleasant to the seller when the right home becomes available. Being fully prepared positions the buyer for success.