If you are looking to buy a property and need a mortgage, you have heard the terms pre-qualify or pre-approved. While some people use them interchangeably, there are important differences that every homebuyer should understand.
According to the Federal Reserve’s definition, a mortgage pre-approval is a written commitment issued by a lender following a comprehensive analysis of their overall creditworthiness. It includes factors such as verification of income, verification of employment, available financial resources, and the evaluation of other areas typical of a credit evaluation process.
Mortgage preapproval status for a loan is usually conditional upon the following:
- A suitable property. The identification by the buyers of a suitable property they wish to purchase.
- Continued creditworthiness. Continued creditworthiness means there is no material change in the applicant’s creditworthiness or overall financial condition before closing the sale.
- Additional terms. Other limitations may or may not be related to the solvency and financial health of the applicant. These added items are ordinarily attached to the traditional mortgage application by the lender. They can include an acceptable title insurance binder, complete a home inspection with some types of loans (VA and FHA), a certification of no termites, or similar again with certain kinds of mortgage products.
Issuance of a mortgage preapproval letter from the lender implies that a credit decision has been made that will more than likely favor the completion of a mortgage commitment letter at some point shortly. In effect, the mortgage loan has been submitted to underwriting. A mortgage preapproval letter, however, is not a guarantee you will get the loan.
A mortgage prequalification is an estimate of your borrowing power. Because you might not have the funds to purchase a home for cash, your ability to buy a house depends on your ability to borrow money. That’s why it is important that you talk with potential lenders before shopping for homes to determine your mortgage buying power and be able to consider different loan programs to decide which might be ideal for you.
Pre-qualification is based on data the borrower submits to a lender, which will provide a ballpark estimate of how much they can borrow. The pre-qualified amount is not a sure thing, because it is based only on information provided. The lender will not take a close look at a borrower’s financial situation and history to determine how much mortgage they can reasonably afford until they reach the pre-approval stage.
Mortgage preapproval takes the process to the next level. Preapproval requires the borrower to provide proof of financial history and stability. The lender will verify income, employment, assets and debts, and will check credit reports. Borrowers will be asked provide information in the form of W-2s, a current pay stub, a summary of assets, total monthly expenses, and if they already own real estate, a copy of their mortgage statement and home insurance policy.
RE/MAX Metro realtor Estelia Mesimer recommends getting a pre-approval letter, which states the amount and type of mortgage the lender is willing to offer, along with the terms. Without first securing lender approval, the seller might not trust your offer is genuine and your offer might not be accepted.
While a pre-approval offer is not a guarantee, it does show sellers you are a serious buyer, which can give you leverage in a competitive market.
Bottom Line: When looking to get pre-approved expect surprises. Lenders look at every detail of your finances. You might be asked about a car loan payment you made with a credit card, for example. Be prepared to answer lender questions as soon as they come up.
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- Venetian Isle, developed in the late 1960s and 70s, is an upscale, deed-restricted neighborhood of 518 homes reachable by bridge. It has deep-water canals to accommodate powerboats or sailboats of any size.
- Snell Isle was developed during the 1920s. It’s known for its waterfront mansions along Brightwaters Boulevard and unique statues of panthers and lions that stand guard on many street corners. Snell Isle is home to the Renaissance Vinoy Golf Club and the St. Petersburg Woman’s Club.
- Bayway Isles is a private neighborhood comprising of two islands in the southwestern part of St. Petersburg. It extends southward from the Pinellas Bayway Causeway into the waters of southern Boca Ciega Bay and is gated and deed restricted. Architectural design is varied; styles range from Mediterranean Revival to Florida Modern. Open water, great views and a boater’s dream come true make this neighborhood highly desirable.
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