The process of purchasing a home takes savvy, time and diligence. It is the most important financial investment we make in a lifetime and studies have shown that a consumer takes anywhere from six months to two years to contemplate the purchase.

The complexity and importance of this transaction gives us every reason to go about it more seriously. This means having every tool at your disposal when you are ready to purchase your first home or move up to a new home. Why would anyone not utilize an important tool–especially if that tool is inexpensive and can save them money, time and energy?

This tool is called a “pre-approval.” What is a pre-approval? First, let us tell you what it is not. A pre-approval is not a “pre-qualification.”

A pre-qualification is an opinion, typically offered by a loan officer after he/she talks with the prospective purchaser. This opinion is based upon information usually given to the loan officer verbally. It would not be unusual for the information not to be verified and the opinion might contain this statement—

“This opinion is subject to the information provided being verified, including income, assets and/or credit.”

Though the loan officer may be well qualified, he/she is just proffering an opinion which is couched on information which may or may not be accurate. Many times, prospective home purchasers do not even understand the questions they are being asked to answer.

On the other hand, a pre-approval is a loan commitment. It is a loan approval that is based upon documentation submitted within the application process and underwritten by someone who has underwriting authority. In this case, the “pre” merely means that the applicant has not purchased a home as of yet. Therefore, the commitment will be subject to these conditions…

1. A sales contract on a property;
2. The appraisal of that property;
3. Final selection of a loan program and locking in a rate.

These conditions are standard on a pre-approval because the property has not been selected. It should be noted that all loan approvals or commitments will have standard conditions such as a clear title and hazard insurance.

The question is–if you are planning to purchase a home, which process should you go through–pre-approval or pre-qualification? The answer is quite obvious. Let’s say that you would like to sell your home. Would you be more comfortable if the prospective purchaser had an opinion or a commitment? Of course, the answer is a commitment.

As a matter of fact, it would not be unusual for a prospective purchaser to have his/her contract accepted over other bidders because of the existence of such a commitment. In effect, you may even obtain the house for a lower price because the seller is more comfortable with your bid. The better price may also happen because you are prepared to go to settlement more quickly with an approval in your hand. If the seller wants a quick closing, you will be prepared.

There are other benefits of a pre-approval. These include making sure you do not waste your time looking in a price range you cannot afford and giving the lender more time to work out problems while you are looking. Why shouldn’t the lender be working while you are looking? A pre-approval actually should stand for a better transaction–more negotiating power with less stress. We think you would agree that these were worthy goals. Thinking about buying a home? Start the process with a visit to your lender!