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Before Making an Offer On A House, Know The Difference Between Being Pre-Qualified and Pre-Approved

Updated on May 20, 2009

When you've decided it's time for you to begin your serious house hunting efforts, it's best to know in advance from your lender whether you pre-qualify for a loan or are simply pre-approved. While the terms are similar and often get interchanged, the truth is that they are really quite different. The difference that you need to be aware of is that pre-qualifying determines the amount that a lender is willing to lend to you. It involves getting a letter from mortgage advisor who has looked over your gross income and debt ratios based on what you tell them, as well as your work history to see if you will be able to make the monthly payments. A good mortgage advisor should be able to present you with a pre-qual letter fairly quickly.

A pre-approval on the other hand, goes one step further and may involve some non-refundable fees. For an actual pre-approval, your credit report is actually pulled to verify your credit history, as well as verifying your income, assets for down payment and your ability to cover the closing costs by asking for various documentation. Once this has all been completed your loan officer can draft a letter that lets both the realtor as well as the seller know that you are fully qualified. This allows for more serious negotiations to begin on the transaction.

The importance of your credit report and FICO score

Your credit score (also referred to as a FICO score) is a number that has been calculated on a point system in which you receive more points for being a good borrower and lose points for payment blemishes The FICO score, which was developed by the Fair Isaac Corporation, is the most widely used scoring system and is used by pretty much all lenders out there, whether you're applying for a home mortgage or a car loan. It taps the three main credit reporting bureaus which are TransUnion, Experian, and Equifax.

The actual number scores available in your FICO are within a range starting with a low of 350 points and going to a high of 850. People with under a 620 score are typically considered to have damaged credit. When you fall below this threshold you begin to see loans get quite a bit more expensive. Around 660 your credit is considered good and your options become more favorable while anything above 720 is considered excellent. This is where you pay the least on borrowed money.

Let's take a look at an example. First we'll look at a person with a FICO of 620 getting a 30 year loan for $215,000. For this example we will say they get a rate of 7.60%. If they had a score of 720 or higher they would qualify for a 6.00% rate instead (a difference of 1.60%). This works out to a savings of $230 per month. If the FICO score happened to be below 620, they would now enter what is known as the sub-prime market and the same loan might get a rate as high as 8.5% or even higher, depending how far below 620 their score was.

You will want to be sure to get the best possible mortgage rate, so you should start looking at, and cleaning up any possible blemishes or errors on your credit report at least six months before your loan application. Maintaining a DTI (that's industry lingo for "debt-to-income") ratio of less than 36% could help boost your score by up to 10%. Another thing lenders like to see is a history of long-term credit and ability to regualrly pay back a loan over time. As a loan applicant, every effort should be made to make sure there are no mistakes on your report. If you find any, you need to get them straightened out as quickly as possible.

If you're looking for more helpful advice on the whole mortgage process, we invite you to visit us at our Portland Home Loan website.

If you're looking for more helpful advice on the whole mortgage process, we invite you to visit us at our Portland Home Loan website.

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