When purchasing a home, a pre-approval and a loan commitment are both important steps in the mortgage process, but they are different.
A pre-approval is a preliminary assessment of a borrower's creditworthiness and ability to qualify for a mortgage. To obtain a pre-approval, the borrower typically provides financial and personal information to a lender, who will then review the information to determine the borrower's credit score, income, debt-to-income ratio, and other factors that could affect their ability to obtain a mortgage. A pre-approval letter provides the borrower with an estimated loan amount they are likely to qualify for and can help demonstrate to sellers that the borrower is a serious buyer.
One thing to remember is that NO underwriting has taken place when a lender provides a borrower with a pre-approval.
On the other hand, a loan commitment is a formal agreement by a lender to provide a mortgage loan to a borrower, subject to certain conditions. Once the borrower has completed the application process, the lender will review the borrower's financial information and make a decision on whether to approve the loan, this is the underwriting process. If the lender approves the loan, they will issue a loan commitment letter that outlines the terms and conditions of the loan. This letter is a legally binding agreement between the borrower and the lender.
With a loan commitment, the lender is conducting the full underwriting process PRIOR TO you submitting an offer on a home.
Anytime I'm working with a buyer client, I make every effort to make sure they receive a loan commitment opposed to a pre-approval because it makes your offer to buy the home so much more competitive. Why so? There are several reasons, including 1) your offer becomes almost "as good as cash" due to the fact that the lender has already done the underwriting and agreed to provide you with a loan, 2) You can now waive your loan contingency because once again the lender has already done the underwriting and has agreed to provide you with a loan, and 3) You can close quicker because once again the lender has already done the underwriting (which is why closing usuallly takes 30-60 days) and agreed to provide you with a loan.
In summary, a pre-approval is a preliminary assessment of a borrower's creditworthiness and ability to qualify for a mortgage, while a loan commitment is a formal agreement by a lender to provide a mortgage loan to a borrower, subject to certain conditions.
When you're ready to start looking for a new home, ask your Realtor and/or lender about how to get a loan commitment. If they don't know what it is, then time to find a new Realtor and/or lender.
Posted by Brett Hickey on
Leave A Comment