Prequalification vs. Preapproval vs. Loan Commitment Letter: What’s the Difference?
When buying a house, you have the option of getting prequalified or preapproved by your bank. Having this kind of documentation will help you secure your dream home. However, some sellers are asking for even more in the form of a Loan Commitment Letter. All these are very important, but do you know the difference?
When you decide to buy a home, talk with a lender to determine how much home you can afford. However, you have three different levels of qualification. Let’s look at each to determine which one is right for you.
A Pre-Qualification Letter
As you begin looking for a home, you will need to speak to a lender. The first step is answering some basic questions. Then the lender will look at your credit report. At this point, the lender may issue a pre-qualification letter. This states the lender looked at your credit and believes you are able to get a mortgage loan. However, a pre-qualification letter shows you have not supplied the lender with everything needed to make a final determination. In a seller’s market, the seller may want more proof that you can close on the loan.
Pre-Approval Letter
The next step is the pre-approval letter. Once the borrower has provided all the needed information and supporting documentation, along with the credit report, the lender runs the information through the underwriting process. During this time, you may be asked to clear up any issues or concerns. If approved, the lender will prepare an official pre-approval letter.
When you have this letter, you will be in a better position to make an offer on a house. This letter informs the sellers that your lender has examined your finances, and you have been approved for a mortgage up to a specific amount.
Loan Commitment Letter
This letter is essentially a promise letter. A lender provides this letter when the underwriter has looked at all the information and made sure all the loan conditions have been met. A commitment letter specifies not only that you can get the loan but the conditions of that loan. It will state the amount, the interest rate, the points, and the time which the commitment is valid.
Be prepared to wait for a loan commitment letter as the process to receive one can take some time. The final commitment, of course, will be dependent on the appraisal of the home. If the home doesn’t meet the guidelines, then the mortgage offer will be removed.
As we have seen in the past, the market, interest rates, and a change in the buyer’s credit report can all affect the loan until closing. It is important for the buyer to keep financial changes to a minimum including things like changes to employment, debts, and credit issues such as late payments.
It is important for you, as a buyer, to get started on this process as soon as you decide to buy a home. With homes in Florida often receiving multiple offers, showing that you are financially ready to take on a mortgage will help you be the winner of any bidding war. If you have questions about talking with a lender or would like a list of our preferred lenders, please give us a call today.