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Mortgage Prequalification vs. Mortgage Preapproval

November 13, 2015

Mortgage prequalification is an assessment of whether your debt-to-income ratio fits underwriting guidelines for one of the many types of home loans that we offer. It also provides an estimate of how much you may be able to borrow – a good first step in the house-hunting process.

While this number is informative, keep in mind how much you may qualify to borrow is often more than how much you can afford to spend on your new home and still have money left over for the other important things in your life like a ski pass to Bridger Bowl or Big Sky!

I like to start the conversation with “what payment are you comfortable with?” To me, that is more important than what number I can stretch your ratios to tolerate. Everyone has varied expenses and lifestyle choices so one person may be comfortable at a debt ratio of 25%, while another may be just fine with a very expensive house and little money left over.

Getting prequalified doesn’t require a commitment from you or the Lender. It isn’t a true application and your credit history doesn’t factor into your prequalification. Even so, you should be aware that when you apply for a mortgage, your credit score will affect your ability to qualify. If you have concerns about your credit history, this may be a good time to look at your scores and report so that we can begin to do some long term planning.

When you get prequalified, you can request a letter stating how much you may be able to borrow, based on the information you provided to us. You can give this letter to your real estate agent to show you’re a serious homebuyer. In the busy and fast paced markets of Montana, this can be extremely important in getting an offer accepted.

The PreApproval:

Mortgage pre-approval involves the same steps as a mortgage application – you’ll provide detailed information about your income and assets that will be reviewed by the lender’s underwriters. If approved, you’ll get a commitment by the lender for a specific loan amount. (When you apply for a mortgage, you’re applying for credit to purchase a specific property as well.)

Pre-approval shows you have the resources to make the purchase and it helps you act quickly when you find the perfect home. From the sellers’ point of view, a pre-approved buyer is more attractive than someone who says they can buy a house but have nothing but their word to back up their offer. By proving you have your Lender’s backing, a mortgage pre-approval can help you negotiate on price – and it can be a deciding factor for sellers who receive multiple bids.

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