English is a funny language, full of odd differences. One that throws most of us is the difference between “can” and “may.” In a nutshell, it is the difference between ability and permission. You “can” enter the room if you open the door but you “may” enter the room if you get permission. This idea can be really important, especially in real estate lending. Let me explain.
Say you’re looking for a house and drop by an Open House. The first thing the agent asks is, “Are you Pre-Approved?” Well, you went to your bank and they said you were certainly qualified, so does that mean you can say yes? Probably not.
If buying a home were a relationship, this would be like dating. When you date, you evaluate whether you want to spend more time with this person. In pre-qualification, lenders are judging whether you have the financial strength to take on a loan.
The process is pretty straightforward. You give your lender information on your current debt, income, and assets. They use this to come up with a general picture of your credit worthiness. You don’t even have to do this face to face; it can happen by phone or even over the Internet.
So now you are ready to make an offer on that dream home, right? Not so fast. Remember our discussion of “can” and “may?” Well, let’s now add the word “maybe.” Your pre-qualification says that you might be able to get a loan for a specific level. Think of it as a definite maybe. Definitely a good thing, but not a final answer.
Now we come to the good stuff. Pre-approved means that you “may” borrow up to a specific amount, with some other conditions. If pre-qualification were dating, pre-approval would be getting engaged. Pre-approval typically involves fees as well as your providing an amazing amount of documentation.
Depending on the lender, this can take a few days or a few weeks. When selecting a lender, it is a good idea to check out its track record on delivering pre-approvals quickly. You would hate to miss that perfect house.
Why Is All This Important?
Let me count the ways. First, pre-qualification and pre-approval tells you how much you can borrow. It is awful to fall in love with a house, and then find out it is out of your reach. Better to know which houses to look at.
In a competitive market, multiple offers on a house are always possible. Sellers look for the sure thing. A strong pre-approval reduces the likelihood of a deal falling through. An offer without a financing contingency is a really strong offer, even when it isn’t the highest.
Pre-qualification helps tell you how much you might be able to borrow. Pre-approval tells you and home sellers how much you can borrow. Having this information on hand is a really good idea, especially in a competitive home market.
Happy house hunting!