One of the most misunderstood terms in Boston real estate is the difference between a “pre-approval” (sometimes referred to as “pre-qualification” or “preliminary loan approval”) and a “loan commitment”. Knowing the differences between the two will help you avoid unpleasant surprises when you are in the process putting in an offer on a condominium.
I recently spoke with a Boston condo buyer that was interested in a listing he saw on my website. When I asked if he was pre-approved for a condominium loan he told me that he didn’t want to get pre-approved because it would lower his credit score.
I told him that he was overreacting. A credit score may have a temporary hit after several inquiries although an inquiry is not an application for credit. This first time buyer told me “that’s not what he heard” and that he didn’t want to get a pre-approval every time he viewed a property. I told him one letter is all you need and you don’t need one for each property you view.
Let’s make clear what the difference is between pre-qualification and commitment letters. The pre qualification letter, informs sellers and their brokers that based upon the information received, the lender is indicating that the applicants’ financial, credit, and income information appear to support them for the loan amount listed on the pre-approval letter. It is not a loan commitment. A loan commitment may be issued following the applicant’s consent to move forward with the loan.
There are three main types of guarantees a bank or mortgage broker will provide, and they each require different up-front evaluation on their part and strength in the market on your part: the pre-qualification, the pre-approval, and underwritten approval. If you’re buying in Beacon Hill, Back Bay, or Boston high rise condo you’re going to want to know what each of these entail.
A pre-qualification is just a ballpark figure of how large a mortgage you can afford. For a lender to pre-qualify you, they may ask for your employer’s name and your Social Security number to verify your income and credit score. When a bank prequalifies you, it’s giving you a preliminary statement of how much you could borrow, based on income and asset information you’ve provided. It is not based on any hard evidence, because at this point, you haven’t given your bank statements or had bank officers request your credit report. It’s super basic and is not good for much in the Beacon Hill, Back Bay or Boston high-rise condo markets, but will help you on what condominiums to start looking at online if you’re just browsing.
A bank will issue a mortgage pre-approval once it has all your documents in hand. These could include income verification from employers, recent tax returns, bank and brokerage statements, and credit reports. That assessment will result in a pre-approval letter from the lender that you can present when you bid for a home. Having a pre-approval in hand gives you a jump on other potential buyers. It lets the seller know you’re a good candidate, and that the bank is likely to award you a loan. It’ll also make you feel more prepared to buy. This is the most common document provided to buyers by lenders. Keep in mind that you’re not required to borrow from the bank that issues your pre-qualification or pre-approval.
A loan commitment requires a verification of your ability to pay the mortgage (real estate loan). This process includes such items as your income, employment history, assets and credit score. It also requires the review of the Boston condo itself, such as the value and condition of the property, the status of title to the property and a property appraisal to list just a few items.
The next question, many Boston condo buyers ask: Do most pre-approvals result in loan commitments? Assuming the lender is diligent during the pre-approval process, yes. However, it is not uncommon for a consumer to receive a pre-approval and then find out later that the pre-approval was subject to conditions the consumer could not meet, thus prohibiting them from receiving the loan, or forcing them to accept a loan at a higher interest rate or lower loan amount.
If you’d like more information please feel free to contact Ford Realty at 617-720-5454.
From Wikipedia, the free encyclopedia
In lending, pre-approval has two meanings:
“The first is that a lender, via public or proprietary information, feels that a potential borrower is completely credit worthy enough for a certain credit product, and approaches the potential customer with a guarantee that should they want that product, they would be guaranteed to get it. This rarely happens in the financial services industry, and when it does happen, it is usually loaded with fine print that is not immediately disclosed. Usually, what happens is pre-qualification, instead.
Although, to a typical consumer, “you’re pre-approved” means “you already passed the approval process and therefore are guaranteed to be immediately granted the loan if you apply,” the literal meaning is different. The literal meaning is “at a stage before approval.” Thus, pre-approved creates no obligation whatsoever on the lender and no rights whatsoever to the potential borrower. “Pre-approved” is thus a popular advertising catch phrase to induce people to apply for a loan.
The second meaning relates to mortgage lending. People interested in buying a house can often approach a lender, who will check their credit history and verify their income, and then can provide assurances they would be able to get a loan up to a certain amount. This pre approval can then help a buyer find a home that is within their loan amount range. Buyers can ask for a letter of pre approval from the lender, and when shopping for a home can have possibly an advantage over others because they can show the seller that they are more likely to be able to buy the house. Often real estate agents prefer to work with a buyer who has a pre approval as it demonstrates that they are well-qualified to receive financing and are serious about buying a home. A pre approval is based on the documentation the borrower supplies at the time of application, and any actual eligibility to receive the pre approved loan depends on the terms and conditions of the pre approval and ability to secure the loan before the pre approval expires.’
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Update Boston Real Estate updated in 2021
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