Those looking to buy a home and those that are selling a home can easily misunderstand these two terms. There are big differences between the two terms, and it is important for you to understand what those differences are if you are in the market to purchase a new home or your first home. A pre-qualified loan is where a lending institution estimates the amount that you can afford to borrow. This is done without a credit check and is based upon the information that you provide the lending institution. This should be your first step in the home buying process. This is vital because without it you will not know how expensive of a house you can afford to purchase. Getting pre-qualified holds you under no obligations with the lending institution. Another benefit of getting pre-qualified is that they do not check your credit rating.
Many people are unaware that each and every time you have someone check your credit, such as lending institutions; it actually impacts your credit rating. The idea is that if your credit rating is frequently checked, but no loan is taken out or granted, that you must have not qualified for the loan and that you had poor credit at the time. For this reason it is best to not have lenders checking your credit rating more any more frequently than absolutely necessary. Finding out how much you are pre-qualified for, which is merely a rough estimate, is often done for free by lending institutions. Getting a pre-approved loan means that you have actually submitted the paperwork to the lender and that you are requesting the loan. At this stage the lender will review your credit history and will notify of you of the maximum amount that they are willing to lend you to purchase a home.
The lending institution is required to provide you with an estimate of the loan expenses and fees when you are pre-approved. Though it is important to know that just because you are pre-approved, you have not actually entered into a legal contract with that lender. You are not required to get a mortgage through the lender, even though you have been pre-approved. There is usually a fee associated with completing the pre-approval process, because the lender spends a good deal of time on the loan paperwork and checking your history. Going through the pre-qualification process also allows you to compare lenders and their interest rates and terms. The pre-qualification process lets you discuss with the lender any goals or needs you may have regarding your mortgage. The lending institution can then explain your mortgage options and recommend the type of mortgage that might be best suited to your individual needs and requirements.
The overall idea is that a potential homebuyer will find out the rough cost estimate via getting pre-qualified; from there the homebuyer will look at houses in that price range and ultimately select one that he or she wants to purchase. Once the homebuyer has selected a house, the homebuyer selects a lender and gets pre-approved and finds out exactly how much they can get the loan for. Being pre-approved is a big advantage because it shows the seller of the house that you are serious about making a purchase. Being pre-approved also allows you to act quickly once you find the perfect house. You do not have to wait around for time-consuming paperwork to be completed and risk having the house that you want to buy being sold to someone else who has already been pre-approved for a loan. Purchasing a home should not be a hurried process.
Purchasing a home is generally the single largest purchase that you will make in your entire life. Because of this, you should take your time to calmly decide on the best home and best mortgage options for your situation. A typical home mortgage can last anywhere from 15-30 years, and as such, it will be with you for a long time to come.
Completing the processes of getting pre-qualified and pre-approved takes a good deal of time, so the sooner you get started, the quicker you can see how much you can afford and which price markets to shop for a home. It is recommended that you complete at least the step of being pre-qualification before you start looking at homes that are for sale. This will save you and your realtor time, by permitting your realtor to not show you homes that you cannot realistically afford to purchase. Buying a home is an important decision. And, as with anything in life that is this important, you need to take the time and invest the effort to learn all you can, so that you can make the best possible decision for your own personal situation.
By Marv Ko
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