Buying or Selling a Home

Being Pre-Qualified, Pre-Approved, vs. Commited to a Mortgage

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As you start the home-buying process, you're going to hear a lot of jargon being thrown around in regards to what you have to do to purchase a home and particularly what you have to do to get a mortgage. If you're like most first-time homebuyers, you know that you have to get a mortgage, and you can't just choose whichever mortgage you want. However, most new homebuyers don't know that they should get pre-qualified, pre-approved and then committed to a mortgage. In fact, most of them might not know the right order of those three to get the correct loan. Here's the difference between the three:

What does it mean to be pre-qualified for a mortgage?

Getting pre-qualified for a mortgage is the first step in purchasing a home or qualifying for a mortgage. This is a relatively easy step where you call a lender and explain to them what your monthly income is, what your monthly debts are and how much you'd be willing to spend on a down payment. Usually you can do this over the phone or on the internet. A loan officer will be able to give you a rough estimate of what you're most likely qualified for, as well as the different rates, terms and options you could get through his or her mortgage company. Getting a mortgage won't be the same at different lenders, banks and credit unions, so it's good to shop around for different home loans.

Stage 1 Pre-qualification of Mortgage
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Getting pre-qualified doesn't mean that you can go through and look at homes in the quoted price range and confidently make an offer just with word of mouth from a loan officer, though. It is simply an estimate of what you could potentially qualify for; nothing more. In order to more confidently put offers on a home and to get a great realtor working with you, you have to get pre-approved.

What does it mean to be pre-approved for a mortgage?

When you're pre-approved for a mortgage, it is a more formal agreement, although still not a guarantee of funds. A pre-approval is when a lender researches fully into your financial background. They will look at your credit report, employment history, annual income, debts, assets, tax refunds and W2's for the last two years, bank statements, and ask for employment or rental references. They want to see if you're going to be able to pay the amount of money each month that would be required for paying off a home, and how much you could afford each month. 

Stage 2 Pre-approval of mortgage
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Depending on all of this information, the lender will create a pre-approval letter that details how much money you could possibly qualify for when getting a home loan. There are times when you may not be approved (or pre-approved) for a mortgage. Read more about why you may not be pre-approved or qualified for a mortgage with our latest flowchart. 

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 This doesn't automatically give a buyer the mortgage, but it does allow them to find a reputable realtor and start looking at homes within that price range. This letter can be included with an offer letter on a home to show a seller you have enough money to purchase their house.

What does it mean to have a mortgage commitment letter?

Once you have gotten a pre-approval for a mortgage, you can use it to find homes in the quoted price range. After making an offer on the home you like and it is accepted, you have to have your loan approved in order to purchase the home. This means that a group of people called mortgage underwriters will double check that a homeowner is qualified to receive a particular mortgage. They will look even further into your credit history, assets, debts, and so on to determine if you have the ability to pay back the loan. They will also appraise the home, look at the property, ensure the title is legally available to purchase and confirm that they want to invest in the home alongside you. Once they have delved into your finances, they will write up a legal Mortgage Commitment Letter. This is a formal mortgage that you will be able to use to purchase your home. The commitment letter includes the type of loan, the interest rate, the term of the loan, and even more details than the pre-approval letter included. Usually commitment letters have an expiration date to ensure that closing happens quickly for everyone involved.

Stage 3 Commitment Letter
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Once you have a mortgage commitment letter, make sure to request or purchase a home warranty for your new home. You can make sure that your systems and appliances are protected. With a home warranty, when something fails in your new home, and they will fail, you can have them repaired or replaced for less than $100. Learn more by comparing our plans and pricing here.

Still confused as to what a pre-approval is and how to get one? Go to our article on why and how to get a mortgage pre-approval here.

Header How to Get Pre-Approved for a Mortgage

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Stages of a Mortgage
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