You can improve your purchasing power when looking for a home by making sure you are
prequalified or pre-approved by a mortgage lender.
Prequalification:
- A mortgage lender will evaluate a potential homebuyer's credit report plus earnings,
savings and debt information to get an estimate of the mortgage amount the borrower would
qualify for. This is based on documentation the borrower has in hand, or what the borrower
tells the lender. The review can take as little as a few hours or as long as a few
days.
- Prequalification is usually free.
- For an estimate of buying potential, see How Much House Can You
Afford?
Pre-approval:
- This process goes a step further than prequalifying. Pre-approval means the lender
has contacted the borrower's employer, bank and other places to verify all claims of
earnings and assets. In return, the borrower receives a letter stating that he has mortgage
approval for a certain amount.
- Since you already qualify for financing, pre-approval can speed up and improve your
chances of reaching an agreement on the purchase price with the seller.
- The only cost for pre-approval may be the lender's cost of obtaining your credit
report.
"With a pre-approval, you're going to have more leverage when you make an offer," explained
Steve O'Connor, senior director of residential finance at the Mortgage Bankers Association
of America. "You can say, 'I've got a loan approved already that's sufficient to purchase
this home,' and that makes you more attractive to a potential seller."
Once you and the seller agree on a price, you both will sign a sale contract, which will
spell out conditions each party must meet for the sale to go through. A closing of the sale
generally hinges on both the buyer's ability to obtain the mortgage loan and the seller's
completion of some home repairs.
Tip
Remember if any of your financial circumstances change before closing on the sale of the
home, you must contact the lender. The loan prequalification or pre-approval may no longer
be valid.