Pre-Qualification, Pre-Approval, and Mortgage Commitment
Most home buyers will hear the terms above during their search for a home. Although related, these three terms each signify a different level of financial approval from their lender.
1. Pre-Qualification
Useful in Preparing to Look for Property
This term means a lender has taken a general look at your income and expenses and plugged them into a debt-to-income ratio formula. Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your potential to buy a home.
Bottom Line: Pre-qualifying yourself before you start looking for a home will give you a general idea of the price range you can afford. It will not nail-down an interest rate for you, and that factor and others will affect the monthly payments a lender will allow you to carry.
Note: To determine the total monthly payment you will be comfortable with, you should adjust the monthly mortgage payment amount you qualify for by adding an estimate of the monthly taxes and property insurance. If you are considering buying a condo or townhouse, you also need to add on an estimate for the monthly condo maintenance fees.
2. Pre-Approval
Needed To Look at Property
When you are pre-approved, it means a lender has looked closely at both your credit report and your income/expenses. Your lender will tell you the maximum amount of mortgage they will offer, and which programs you qualify for. You'll also have a better idea about your interest rate, estimated monthly payments, and estimated closing costs.
Once you have a pre-approval, you can go shopping for a home with confidence about your buying power -- but it still doesn't mean a lender will approve the loan. Your income and credit report will be checked again before Closing, and the property itself must be appraised.
3. Mortgage Commitment
After Your Purchase Contract is Signed and Attorney Review is Closed
Your purchase contract normally is contingent on your receiving a "mortgage commitment" from your lender by a specified date. However, your lender will not issue your mortgage commitment letter until it has a valid executed purchase contract and it has approved both you and the property you are buying for the loan.
The property you intend to buy must meet the lender's guidelines -- usually meaning the property must appraise at or higher than the sales price. In addition, your lender may require additional information if their appraiser mentions anything the lender feels should be checked further about the property.
Your mortgage commitment letter is issued only when your lender is sure it will lend you the funds. The letter commits the lender lending the money assuming nothing material changes between the time the commitment is issued and your Closing.
Basically, your mortgage commitment is a written notice from your lender stating it will advance funds in a specified amount at the Closing to enable you to purchase the property you have a signed written contract to buy.