By Keith Loria


Planning ahead and being prepared is the name of the game when it comes to finding real estate success. Therefore before you begin seriously shopping for a home it's always a good idea to go over your finances and determine what you can truly afford. Having an exact figure in mind from the beginning will go a long way toward making it easier for you and your real estate agent to seek out the best house in your price range.

That's why getting pre-qualified or pre-approved for a mortgage is so valuable especially in today's competitive market. However it's important to understand the difference between these two terms as they don't mean the same thing.

When a homebuyer is pre-qualified the lender determines how large a loan the buyer can afford by looking at basic information related to income balances and payments on current debts and how much money has been saved for a down payment.

From there qualifying ratios are applied to the numbers and the lender offers an estimate of what percentage of your gross monthly income can be used to pay for the home loan and attached expenses.

The key thing to remember here is that the lender is offering an estimated amount it would approve meaning there's no guarantee. It's merely an educated guess on the part of the lender based on a quick appraisal of the facts. And if you're not honest when it comes to sharing your financial information it could come back to hurt you in the end.

On the other hand when a mortgage is pre-approved it involves a much more stringent examination into your finances. During pre-approval the lender examines and verifies your debt income savings assets and credit report to ensure you can repay the loan amount. Taking the time to go through this process shows sellers that you have indeed been approved for a loan of a certain amount.

While pre-qualification is really just an educated guess of a homebuyer's purchasing power a pre-approval goes one step further guaranteeing that the prospective borrower would be approved for the loan. That's why sellers prefer to negotiate with pre-approved buyers because they already know the buyer is financially qualified to obtain the financing they need to close the transaction.

Going through the pre-approval process also lets your real estate agent know you're serious about purchasing a home and won't have any last-minute financial problems that could hold up a deal.

In the end it's important to remember that pre-qualifications simply provide a quick way to show a seller that you're a viable candidate for buying a home. Additionally a pre-qualification will get your mindset focused on gathering all the financials you're going to eventually need. Once you've been pre-qualified for a mortgage it shouldn't stop you from taking the extra step and getting a pre-approval letter.

Contact our office today to learn more about pre-qualifications and pre-approvals.
Reprinted with permission from RISMedia. 2013. All rights reserved.