Preapproved Mortgage

Getting pre-approved by your mortgage lender is an important step for serious buyers and gives you an edge in terms of bargaining power. A pre-approved mortgage means that, although you don’t have the money in your hand yet, your bank or lender has guaranteed that you will be approved when you do apply. To get pre-approved, you have to submit your financial information to your lender, such as your monthly income and records of your outstanding debts (will require a credit check) so the lender can check your debt-to-income ratio. If you are pre-approved, the lender will give you a letter, which you can show to seller as proof of your creditworthiness.

A pre-approved mortgage is an important asset for homebuyers because it may motivate a seller to take a lower price or enter into a contract with you. Without a pre-approved mortgage, your offer to buy a home will be "loan contingent." That is, if you can’t get financing, the contract falls through and the seller has to start all over. When it comes between choosing an offer that is loan contingent and one from a buyer with a pre-approved mortgage, it makes more sense to go with the latter. Plus, on your end, being pre-approved expedites the loan application process since you’ll have most of the paperwork taken care of already.

While it’s important to get pre-approved for a mortgage, it’s also critical that you do so when you’re seriously looking to buy a home. Because the market may change or your financial picture may change - your credit score could dip or you could lose your job - mortgage pre-approvals are only valid for a certain amount of time. And in most cases, you’ll have to pay to lock in your mortgage interest rate, which is something you don’t want to have to do over and over.

If you just want to see how much house you can afford, you can get pre-qualified instead. Pre-qualification is different from pre-approval, as it’s merely an assessment of how much you can likely afford based on unverified, self-reported financial data. Pre-qualification from a bank isn’t a guarantee that you’ll be approved for a mortgage, thus is only helpful as a tool for your own home buying search. Pre-qualification usually doesn’t give you any leverage in a bidding war.

So, remember, when it comes to a pre-approved mortgage vs. pre-qualified mortgage, a pre-qualified mortgage isn’t a guarantee, but will help you narrow down your choices in terms of price range. A pre-approved mortgage is a time-sensitive guarantee from your bank that shows sellers that you can get financing and move towards closing quickly.