Pre-Qualification vs. Pre-Approval

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Financing

Even if you are looking to pay for your house with a pile of cash, the sellers still want proof. And by proof, they don't want to see a picture of the money. They will require you to show proof of funds. Either from a bank account or a letter from your bank. 

If you decide you finance your next property, you should always get a pre-qualification letter before you start the process. Not only will this give you a great idea of what your monthly payments will look like so that you can be comfortable making the payments, but it will also speed up the home buying process. When you go to submit an offer most sellers need to see proof of funds or a pre-qualification letter before taking your offer seriously. Especially if you are buying real estate in New York it is a good idea to have a real estate attorney lined up so that they can quickly send the contract to them if they accept the offer. 

I have seen numerous buyers find a house they love and miss out on it because they want to put in an offer but haven't been pre-qualified yet.  They try and get pre-qualified quickly but by the time they get all their documents together and find a bank or mortgage lender, a few days go buy and another offer gets accepted.  Typical documents that you will need to get pre-qualified are 30 days worth of pay stubs, 2 months of bank statements, last 2 years W's, and they will pull your credit. If you are self employed they typically request the last 2 years tax returns, most recent 2 months of bank statements and your credit report. Additional assets are always helpful in this process. 

A common question that I get asked when people are buying real estate in Queens, Brooklyn, Bronx, Westchester, Manhattan, or Long Island is - What is the difference between pre-qualification and pre-approval?

Pre-Qualification vs. Pre-Approval

 One way to reduce stress during the process of home buying is to seek pre-approval, actually applying for a loan before finding a house. The loan agent assembles a credit package that includes a loan application, credit report, income and asset information, and supporting documentation. These documents are then submitted to prospective lenders who underwrite the file, issuing credit approval or denial. 

Buyers who are pre-approved are taken more seriously than their pre-qualified counterparts. Pre-qualification is not a loan commitment from a lending institution; it is only a loan agent’s opinion that you will be able to obtain financing. Verifications are not usually made so formal approval is not issued. These days, virtually anyone can achieve pre-qual status.

Pre-approval, on the other hand, signifies that the lender has taken the application through a rigorous procedure. So buyers with pre-approval status can basically write their own ticket.

 

Benefits of pre-approval:

1. If you make an offer on a home and then apply for a loan, you are at the lender’s mercy. He sets the interest rate and points, aware that you do not have time to shop around.

2. Understanding the breadth of your financial reach will save the time spent looking at houses you can’t afford.

3. Shopping for a loan allows you to settle on a house payment that fits your lifestyle. If you rely on your lender to tell you what you can afford, you may end up with a high mortgage payment. Most people can qualify for more than they would feel comfortable paying.

4. Having a pre-approval letter from a lender gives you an edge in a situation where multiple offers have been made on a house.

5. Pre-approved buyers can generally close escrow more quickly. Once you submit your credit package, most of the legwork has already been done.

 

Remember, neither pre-approval nor pre-qualification are absolute loan commitments. Lenders must still assess property appraisals, verify information, and, in many cases, verify credit before funding the loan.