Why is being Pre-Approved so much better than being Pre-Qualified?

Every mortgage lender can offer you a "pre-qualification." It’s usually done on the spot and costs nothing.  This can be misleading, because just like free advice, a "pre-qualification" can be worth just about what you paid for it.  To be pre-qualified, a lender will ask you the following questions:

· What is your monthly income?  (Gross wages and/or salary, plus any recurring overtime pay, bonus, commissions, child support, etc.)

· What are your recurring monthly payments?  This is what you pay out every month on debts, loans, credit cards, child support, etc.  It DOES NOT include other things like utilities, insurance, groceries, etc.

The lender will then subtract your recurring monthly payments from your monthly income.  A portion of what’s left will be used to repay your mortgage loan.

For example, a borrower and co-borrower have combined monthly income of $7,000 per month. Their car payments, minimum monthly credit card payments and student loans take up $1,200 a month.  This borrower and co-borrower could afford:

· A monthly principal and interest payment of $1,046.  This would allow them to get a 30 year fixed rate Conventional mortgage at 8% interest; and buy a $150,000 house with a 5% down payment.

· Or a monthly principal and interest payment of $991.  This would allow them to get a 30 year fixed rate FHA mortgage at 8.5% interest; and buy a $130,000 house with a 3% down payment.

· Or a monthly principal and interest payment of $1,514.  This would allow them to get a 30 year fixed rate VA mortgage at 8.5% interest; and buy a $193,000 house with a 0% down payment.


But here’s the potential problem with Pre-Qualification:
The lender issues the "pre-qualification" contingent upon the information they were given.  Once the borrower and co-borrower in our example sign a purchase agreement, they will actually apply for financing approval.  If any of the information changes between the pre-qualification and the actual application, the pre-qualification is null and void … useless.  Often, it can be a very honest mistake. For example, the borrower and co-borrower mis-add their combined income.  It’s only $6,800 a month, not $7,000.  Or, they overlook a credit card balance that requires a $50 a month payment.  Simple things, but they can derail your next home purchase.

Get Pre-Approved!

How can you avoid these pitfalls? Insist on a "pre-approval!"  What’s the difference?  Pre-approvals take a little longer (up to 48 hours) because you actually begin the application process up front.  Also, there is usually a nominal charge for a pre-approval, to cover the cost of a copy of your credit bureau report.  In a pre-approval, the lender will also verify your income.  So, knowing what you make and what you have to pay out every month, the lender can issue with confidence a pre-approval letter stating that you are pre-approved up to a monthly payment of "X" in principal and interest.

A pre-approval letter from a lender is a powerful negotiating tool for the buyer! It’s like walking into the purchase negotiations with cash.  The last thing a seller wants to do is pin his or her hopes on the buyer getting approved for financing, just to see the whole deal fall through if the buyer can’t get approved. This could cause a costly and inconvenient delay for the seller of the house to move on to their next house as well!  Consequently as the potential buyer, with a pre-approval letter in hand, you could negotiate a lower price for your dream home because the seller knows it’s like cash in hand!

Pre-approvals can speed your move as well!  With the application process already started, income verified and your credit bureau report already a part of your file, once you sign the purchase agreement for your home, the only things left to be done are:

· Obtain an appraisal on the property.

· Wait for the title work to be completed.

· Schedule the loan closing.

Very often with a pre-approval, you can close on your home loan in just two weeks after you’ve signed the purchase agreement!  So, pre-approvals can save you time AND money … they’re greatly preferred over just a "pre-qualification!"