Pre-Qualified Vs. Pre-Approved - What's The Difference?

By Brian O'Connell on February 26, 2009   A A A

Filed Under: Home Purchase, Mortgage, Options

Ralph Waldo Emerson, American essayist and poet, once said that the future belongs to those who prepare for it. This is sage advice for home buyers who need to lay the necessary groundwork to buy the home of their dreams.

Without good preparation, many buyers get lulled into the mistaken notion that if a lender pre-qualifies them for a mortgage this means that they have been pre-approved for a home loan. Unfortunately, there's a world of difference between these two terms. If you've ever been confused by the two, we'll bring you up to speed on how these terms differ - and why a misunderstanding can mean disaster for borrowers.

The Skinny on Pre-Qualified

Getting pre-qualified is the initial step in the mortgage process, and it's generally fairly simple. You supply a bank or lender with your overall financial picture, including your debt, income and assets. After evaluating this information, a lender can give you an idea of the mortgage amount for which you qualify. Pre-qualification can be done over the phone or on the internet, and there is usually no cost involved. Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home.

The initial pre-qualification step allows you to discuss any goals or needs you may have regarding your mortgage with your lender. At this point, a lender can explain your various mortgage options and recommend the type that might be best suited to your situation. (For more, see Mortgages: How Much Can You Afford.)

Because it's a quick procedure, and based only on the information you provide to the lender, your pre-qualified amount is not a sure thing; it's just the amount for which you might expect to be approved. For this reason, a pre-qualified buyer doesn't carry the same weight as a pre-approved buyer who has been more thoroughly investigated. (To read more, see Shopping For A Mortgage.)

The Skinny on Pre-Approved

Getting pre-approved is the next step, and it tends to be much more involved. You'll complete an official mortgage application (and usually pay an application fee), and then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. (Typically at this stage, you will not have found a house yet, so any reference to "property" on the application will be left blank). From this, the lender can tell you the specific mortgage amount for which you are approved. You'll also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock-in a specific rate.

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With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. Obviously, this puts you at an advantage when dealing with a potential seller, as he or she will know you're one step closer to obtaining an actual mortgage.

The other advantage of completing both of these steps - pre-qualification and pre-approval - before you start to look for a home is that you'll know in advance how much you can afford. This way, you don't waste time with guessing or looking at properties that are beyond your means. Getting pre-approved for a mortgage also enables you to move quickly when you find the perfect place. When you make an offer, it won't be contingent on obtaining financing, which can save you valuable time. In a competitive market, this lets the seller know that your offer is serious - and could prevent you from losing out to another potential buyer who already has financing arranged.

Once you have found the right house for you, you'll fill in the appropriate details and your pre-approval will become a complete application.

Getting Committed

The final step in the process is what's called a "loan commitment", which is only issued by a bank when it has approved you, the borrower, and the house in question. This means the home should be appraised at or above the sales price. The bank may also require more information if the appraiser brings up anything he or she feels should be investigated (i.e. structural problems, accessibility issues, outstanding liens or litigation in progress). Your income and credit profile will be checked once again to ensure nothing has changed since the initial approval. (For more, see Understanding Your Mortgage.)

A loan commitment letter is issued only when the bank is certain it will lend, so the commitment date on your purchase contract should be closer to closing than to the date of your offer. (The seller can ask to see that letter as soon as the date has passed, so beware of anyone who tries to put an early commitment date into your contract).

One Last Word

Be warned. Pre-approved and pre-qualified are not the same thing, so don't assume that the bank will provide your loan until you have the former. The mistake could cost you your new home!

Tell Me Again: How Does Rent to Own Work?

What is the difference between renting and Rent to Own?

How much do you need to put down to move out of the Rental Rat Trap and toward Home Ownership with a Rent to Own property?

Find out here:

Typically, when you rent -- as you probably know -- before you can move in you pay first month's rent plus a security deposit equivalent to one to two month's rent, depending on the owner and/or the how the owner feels about your credit score. So on a rental in the $1,500 range, $3,000 would cover first month's rent and security deposit. If the owner wants two months security deposit, as many owners require, or one and a half month's security deposit, you'll need more than $3,000 to move into a $1,500 per month home.

With a typical Rent to Own, the tenant/buyer puts down an amount as "option" fee, usually beginning in the $5,000 range, plus first month's rent -- so around $6,500 to get into a Rent to Own on a $1,500 per month property. The option fee is what locks in the "first right of refusal to purchase" and locks in the agreed upon purchase price.

Because the owner is giving up first right of refusal and locking in a purchase price in a Rent to Own contract, the option fee is non-refundable. He wants to know that you're serious about buying, and that you will take the steps necessary to qualify for a mortgage -- improving your credit or increasing your income are the usual courses of action -- so that you will follow through with the purchase.

Do you have a tax return coming, or a family member who could help you get into that range do to Rent to Own?

Have you spoken with a mortgage broker to find out what you need to do to qualify for a mortgage, or how soon you could qualify, and for how much?

Lenders are finally starting to loosen up a little bit after the freeze they put on home lending for the past 6 years.

If you think you're close, now is the time to speak with a mortgage broker and take the steps needed to qualify. Home prices and mortgage rates are going up. It's turning into a seller's market again.

Delaying purchasing a home could end up costing a buyer 10s or hundreds of thousands of dollars in additional purchase price and interest payments over what you would pay right now....

How Can You Pay Zero Income Tax?

We all hear about how rich people don’t pay taxes. How do they do it?

In a word: Deductions.

They deduct expenses from their income – and this is allowed by the IRS – which eventually wipes out their entire tax bill, or pretty much all of it.

So did you owe taxes this year? Or, if you’re getting a refund, why did you let Uncle Sam hold on to your money if you didn’t need to?

Rich people don’t play that game, why should you?

So how can you get these deductions working for you? If you’re still renting and don’t own your residence, one big way you can eliminate taxes is to buy a home.

And did you know you can own a home for probably about the same as you’re paying in rent, except you can then deduct the mortgage interest payments directly from your earned income on your tax return? You can't deduct your rent from your taxes, can you.

And did you know that you can deduct most home improvement or repair costs as well?

For me, once I bought my first home, paying any income tax at all just went away. The allowable deductions took my taxes down to zero, and I no longer had to have taxes withheld from my paycheck. Chances are the same will happen for you.

So how do you get there?

If you have less than perfect credit, can’t qualify for a mortgage, and have little money to put down, how do you move toward home ownership?

Rent to Own is one creative solution. With a Rent to Own home you can get in with a smaller down payment – such as your tax return – and earn rent credit toward the purchase price every month while you do the things you need to do to eventually qualify for a mortgage.

If you’ve got a sizable tax refund coming to you, explore your options of moving toward home ownership through the Rent to Own solution. Call us and let us show you some Rent to Own homes in your neighborhood and price range, and let’s get you moving toward zero income tax!

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We have a lot of Rent to Own homes available now. Call or text 630-697-4500 or email Adam @ MyHappyHomeSolutions.com for more info, or visit our website at MyHappyHomeSolutions.com to watch video tours and get more info.

Please note that not all available rent to own homes are shown on our site. Sometimes they are rented before we even have a chance to post them, so get on our mailing list to stay informed about all new properties!

Our primary focus is on homes in the Chicago suburbs, but we have associates who have Rent to Own homes available NATIONWIDE! Whether you're looking for a Rent to Own home in Chicago or Chattanooga, Illinois or Alaska, we can help you find that home! Contact us and let's get you into a nice new home!

Rent to Own When You're Not Ready to Buy

Just a few years ago, you hardly ever heard the term "rent to own" in a market where homeowners had multiple bids from which to choose. But now, with so many homes languishing on the market, it's a different ballgame. Homeowners are more willing to work out rent-to-own agreements, even with people who would be turned down for home loans.

A rent-to-own contract requires prospective buyers to pay monthly rent to the homeowner, with a portion of it going toward a home purchase at a later date. This contract usually lasts one to three years at which time both parties start the standard home purchase, says Rich Arzaga, a financial planner in Walnut Creek, Calif., who has taught commercial real estate investment at University of California, Santa Cruz.

"If you've had your house on the market for a while, this transaction could let you move while having someone in your house generating cash flow for your mortgage," says Ron Phipps, president-elect of the Washington D.C.-based National Association of Realtors.

For wishful homebuyers with checkered credit histories, it's a homebuying option worth considering, says Sam Tamkin, a real estate attorney in Chicago. "You may be unable to qualify for a loan right now, but there are sellers who may be willing to consider renting to you with an option to purchase later."

Pros and cons for both parties

Besides having time to build up a down payment and good credit record, renters have the advantage of "trying out" the house and neighborhood, says Arzaga. "You can also lock in the sales price and terms upfront, allowing you to purchase the house at a below-market price in a few years," he says.

Not all the money you pay in rent will go toward the down payment. "Mortgage lenders are the ones who decide how much of your rent payments are credited toward the down payment and closing costs," says Phipps. Some lenders will allow the entire option fee and earned rent credit to count toward the down payment, while others only allow a credit for an amount paid above the market rate for local rentals to be held for eventual homebuying costs. Find the right mortgage broker to get past this hurdle.

For example, the house could be rented by its owner for a standard rent of $1,750. But when negotiating the rent-to-own contract, you and the homeowner can agree that you will pay $2,000 a month, with $250 as your homebuying credit. At the end of a three-year lease, you'll have $9,000 set aside. That money is returned to you at the time of settlement and can be used for your earnest-money deposit, down payment or closing costs.

If you decide not to buy the house at the end of the lease, you probably won't get a refund. That money is usually only returned to you when you buy the property, says Phipps.

For sellers, the advantages are having an eager buyer and a long-term renter who will care for the house better than the standard tenant. However, there's a risk of the renter opting out of buying your house at lease's end, making you go through the listing process again, Tamkin says.

-- From Bankrate.com

If you want to buy a home, but can’t yet qualify for a bank loan for any reason, call us to find out about the Rent to Own solution.

We’ve got homes available for Rent to Own now, and it’s easy to qualify. We’ve also got some great mortgage brokers, some might even call them miracle workers, we can refer you to. Call us today!

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We have a lot of Rent to Own homes available now. Call or text 630-697-4500 or email Adam @ MyHappyHomeSolutions.com for more info, or visit our website at MyHappyHomeSolutions.com to watch video tours and get more info.

Please note that not all available rent to own homes are shown on our site. Sometimes they are rented before we even have a chance to post them, so get on our mailing list to stay informed about all new properties!

Our primary focus is on homes in the Chicago suburbs, but we have associates who have Rent to Own homes available NATIONWIDE! Whether you're looking for a Rent to Own home in Chicago or Chattanooga, Illinois or Alaska, we can help you find that home! Contact us and let's get you into a nice new home!

To Buy or Not to Buy...That is the Question.

Happy Home Solutions always looks for information to help families find their new home, whether they rent or buy. 

The decision whether to buy or rent is of interest to consumers, investors and other professionals in the real estate market. Most individuals at some point in their lives have or will encounter the decision of whether they should continue renting or instead buy a home. Historically, to make the buy versus rent decision, consumers and investors have been using the price-to-rent ratio. For a particular region, this has been calculated typically as the ratio of the median listing price (or closed sale price) of homes available for sale to the median annual rental price of available rentals in that area.

Zillow has introduced a new approach to make the buy versus rent decision and compute a metric called the “breakeven horizon.” The breakeven horizon is the number of years after which buying is more financially advantageous than renting (at the precise breakeven horizon one can be indifferent between buying and renting). When living in a home for a shorter period of time than the breakeven horizon, renting is more advantageous than buying.

This metric, for example shows that if you live in a home more than 2.8 years in the Chicago area, you save money by buying versus renting.

You can read the complete article which provides a great deal of technical financial information by clicking on the graphic below.

Whether renting or buying is more cost effective depends on your market, where you choose to live and whether you like to do home improvement and maintenance projects yourself.

There are, of course, other factors in making the choice to rent or buy.

Zillow has another discussion of these factors which you can read about by clicking the graphic below.