Getting Pre-approved for a Mortgage

Is Getting Pre-Approved for a Mortgage the Same as Getting Pre-Qualified?

The more you deal with people in banking and real estate, the more terms you’ll encounter that can be confusing. It’s not like learning Latin all over again—talking to a real estate agent is not the same as talking to a lawyer who enjoys throwing around esoteric Latin phrases. There are days, however, when it can certainly feel like you’re re-learning Latin—even if you’re just interested in buying a house.

Abundans cautela non nocet. This Latin phrase means “abundant caution does no harm” (literal translation), or in simpler terms, “one can never be too careful.” There’s a writing rule that says writers should avoid using foreign phrases to prevent looking like they’re showing off to their readers. We’ve generally followed that rule, but we’re making an exception here. Buying a house requires significant mental and physical energy, and if we don’t pay attention to the details in contractual documents, we could get lost in fancy terminology that, if left unclear, will haunt us later. So, when buying a house, abundans cautela non nocet!

As a precaution, it’s important to understand the difference between getting pre-approved for a mortgage and getting pre-qualified. While these terms might seem synonymous, for a lender or banker, each represents a different level of commitment.

Pre-qualification

Let’s start with pre-qualification. In this stage, you meet with a lender and tell them you’re interested in buying a house but that your purchase depends on various factors, like the weather. While we don’t know why anyone would buy a house based on the weather, the point is: if you’re not serious about buying a house—if you don’t know the “why, where, when, or how”—you might want to consider pre-qualification instead of pre-approval.

In other words, don’t waste your banker’s time. A pre-qualification is an early part of the negotiation process that does not involve the lender checking your credit report or scrutinizing your financial capabilities. The lender merely glances at your income and expenses, then provides a rough estimate of what you might afford. It’s just to give you an idea of what you could potentially buy.

At this stage, you’re really just “shooting the breeze” with your lender. “Will he lend to me, or not?” And the lender is probably wondering, “Is this person serious, or are they just killing time before their dental appointment?”

We’ll call this “lack of intent.” But out of professional courtesy, your lender will still answer any questions you have about the home-buying process, and they may hope—if you’re a good risk—that you’ll eventually take out a mortgage with them.

Pre-Approval

When you move into the pre-approval phase, you’ve entered a much more serious part of the home-buying process. The lender takes a closer look at your credit, income (gross and net), debts, and expenses. Based on these factors, the lender decides whether you qualify for a loan and determines the loan amount, available packages, and mechanisms for each option. They’ll also discuss interest rates, including the pros and cons of going with a variable or fixed-rate mortgage.

Getting pre-approved for a mortgage is your ticket to house shopping. It tells builders and real estate agents that you have buying power, so they take you more seriously. Savvy real estate agents can usually spot a serious buyer from a mile away. When you’re pre-approved, they’re more likely to spend time helping you find the right home—and maybe even seduce you into buying!

Getting Pre-Approved for a Mortgage: Steps

These steps are general guidelines; lending institutions may have slightly different procedures. The best approach is to check with your lender.

Step 1: Complete the Mortgage Application

You’ll provide personal details such as your address, date of birth, employment history, salary, other income, debts, assets and liabilities, and the amount of your down payment. If you have a co-signer or guarantor, you should indicate this on the application. Many banks allow you to complete the application online.

Step 2: Lender Determines Loan Amount and Interest Rate Lock-In

After assessing the information on your mortgage application, the lender will inform you of how much they are willing to lend you and the available interest rates and amortization terms. If they approve you for $160,000 at 6.8% interest for five years, they will lock in those terms for 90-120 days. This means that if interest rates rise during that period, your rate stays the same. If they fall, the lender may adjust your rate accordingly.

Step 3: Renewal of Pre-Approval

If you haven’t found the right property within 90 or 120 days, inform your lender that you wish to renew your pre-approval. The lender may offer you the same terms, but this isn’t guaranteed. If rates have risen since your initial approval, they may adjust your interest rate accordingly.

Step 4: Verification of Information and Property

Getting pre-approved does not mean you’re fully approved. Your lender will verify the information you provided and assess the property you’re interested in. They need to ensure that both your financial information is accurate and that the property is viable. This is to protect the bank’s interests in case you default and the property is foreclosed upon.

Step 5: Approval

Once you’ve chosen a property and your lender has verified all the information, they will officially approve you for a mortgage loan. They will issue a commitment letter confirming the loan amount, interest rate, and any additional documents required to release the funds. Your approval is contingent on providing these final documents, such as proof of your down payment source. The lender may also request an appraisal of the property to ensure its value.

That’s the process for getting pre-approved for a mortgage. If you think this was challenging, just wait—moving in and turning your house into a home is a whole new level of commitment!

At this point, though, congratulations are in order. Not everyone makes it past the pre-qualification or pre-approval stages. It’s as if the bank is saying, “You’re a good risk.” But stay vigilant with your mortgage documents.

Ignorantia juris non excusat (just because you weren’t aware doesn’t mean you’re not liable)!