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One of the first things you need to do when you are considering buying a home is to determine how much home you can afford. What this means, really, is how much money will the lender allow you for your loan. An outstanding way to do this is to either get pre-qualified for the loan amount or (better yet) get pre-approved for the loan amount from the lender. There is a difference between pre-qualify and pre-approve, and this article will examine both of those.

Pre-qualification

Pre-qualification is a little like a practice run through the loan application process. You will supply the important details of your credit and employment history to the lender and the mortgage lender will use those details to determine how much money you can afford in your loan. This is only an estimate, of course, but it gives you a very good sense of how much house you should be looking for, based on price. The pre-qualification process may take only a few minutes, or a few hours at most, and there is usually no charge for this service.

It is good to keep in mind that even though a pre-qualification is not binding on the lender it can be used as a very good indicator to the seller that you are serious and that you are creditworthy. The reason pre-qualify results are not binding to the lender is that your details have not yet been verified. However, if the information that you gave to the lender is true and accurate, you can expect that your loan will be approved for around the amount that you were quoted by the lender.

Pre-approval

Pre-approval may begin with pre-qualification but it goes further. In pre-approval, the lender will verify your information. The lender may contact your employer, your bank and other sources to verify your income, assets, credit history, and current debts. The lender will then issue you a letter stating that your mortgage is approved for a certain amount of money within a certain amount of time. When you show this letter to sellers they know that you all but have the money in your pocket and they will be much more willing to negotiate with you than with someone who walks in empty handed.

Another benefit to pre-approval is that you know, up front, the amount of the loan that you can get from the lender. This may allow you to look at more homes, some of which you may not have believed were in your price range. It also gives you great leverage when making a deal with a seller. If a seller’s price is just a bit more than what your loan letter says you can get, he or she may be more willing to drop the price to match your loan limit. All in all, being pre-approved for a home loan is a great way to get started.

It should be noted that in some cases, you may be charged a small fee for pre-approval. There may be fees to cover the cost of your credit reports and your application.

An important side note: If your financial circumstances change before closing, make sure you notify the lender, as your pre-qualification or pre-approval results may no longer be valid.

Peter Kenny is a writer for The Thrifty Scot, please visit us at Bad Credit Remortgage and Mortgage Protection