If you have considered shopping for a home, then you are going to want to find financing for your purchase. In fact, a smart homebuyer will have done their financing research before they start looking for the home of their dreams. Showing sellers that you have the ability to get financing will make any offer you make that much stronger. Any lender will be happy to provide you with a prequalification letter for a mortgage, but read the prequalification carefully and you will see it is not truly an indication that you will be approved for a loan. To be a smart buyer what you need is to be preapproved, not prequalified.
A prequalification letter is exactly what it says it is; it is a letter issued before you have been qualified for a mortgage. Prequalification letters include the same information for just about everyone. It will state that if you meet the credit and income conditions of the lender they will extend you a loan. Because the letter does not guarantee any loan, it is issued without any review that the credit and income conditions are acceptable. Many buyers see the word prequalified and think that means that they have been considered for the loan, only to apply and find that it is not the case. Before you go house hunting, what you need is to get a preapproval.
A preapproval letter is also exactly what is says it is, a letter issued by a lender once a buyer has been qualified, but before they have received their approval. Unlike a prequalification letter, a buyer must provide proof of their income and have their credit worthiness reviewed before a lender will issue a preapproval. A preapproval letter will state that the lender has reviewed the buyer’s financial information and has agreed to extend them a loan should the financial and credit conditions remain the same and underwriting condition are met.
Especially in this tighter mortgage environment, a prequalification letter will not be taken seriously. House hunting with a preapproval letter shows the seller that you are in a position to make a serious offer. When you have a preapproval letter, the seller will know that you have met the conditions required to qualify for a mortgage, and that you can afford to make the offer that you are making. This puts you in a strong position to begin negotiations on the home of your dreams.
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About David Goldstein — David Goldstein is an Owner and Founding Partner of Express Schools, LLC. which operates online education providers Real Estate Express, Insurance License Express and License Tutor. Follow him on Twitter.