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The Power of Pre-Approval

If you are thinking of buying a house, gain some bargaining power before you start house hunting by first getting pre-approved by a mortgage lender.

Once you have made the decision to buy a home, it's tempting to immediately jump in your car and start searching for your dream house. However, that may not be the wisest place to start. Working with a lender first helps you determine how much house you can afford. Then, your shopping experience will allow you to focus your search on homes in your price range. Additionally, it can also give you tremendous bargaining power when you make an offer on that perfect house you have decided you can't live without.

A lender can provide you with either a pre-qualification or a pre-approval before you find the property you want to purchase. It is important to understand the difference between the two so you can decide which option is best for you.


A pre-qualification is an estimate of how large a mortgage a lender is willing to loan you. It is based on income, assets, and debt information you provide the lender. Since the information is not verified, the lender is not obligated to make this loan until your application is put through an actual approval process. Once you find your house and have a contract, you would then have to fill out an application. The information you provide the lender is then verified, your credit report is pulled, and an appraisal of the property is performed.

So What's the Benefit?

It's free. However, there is no obligation to use that lender when you are ready to apply for a loan. Also, you can share the information when you meet with a realtor to avoid wasting time on homes not in your price range. The lender will provide you with a pre-qualification letter that states how much you qualify for. The pre-qualification is subject to verification of your income, assets, and liability information, and an appraisal on the home you decide to buy.


A pre-approval is a firm commitment from the lender. The lender will verify your credit history, employment information, assets, and liabilities. Unlike a pre-qualification, you are actually approved for a certain loan amount; subject only to an appraisal of the home you decide to buy. To help you understand the mortgage process, see the U.S. Federal Reserve Board publication Looking for the Best Mortgage.

What's In It For You?

There are clear benefits to a pre-approval. First, when you find the perfect home, the loan process will proceed much faster than if you start from square one. Second, you gain bargaining advantage when you begin house hunting. You will be armed with a letter from the lender stating that you are pre-approved for a certain loan amount, subject to a property appraisal. This letter will give sellers a great comfort level, since they know you already qualify to purchase their house. Additionally, if you and another buyer, who is not pre-approved, are bidding on the same house, the seller will feel much more comfortable with you as the buyer since he/she knows you are pre-approved. The U.S. Federal Deposit Insurance Corporation (FDIC) has a Tip Sheet to help get pre-approval for a mortgage.

You should keep in mind that a pre-approval is usually not free. You may have to pay for a credit report and any other fee the lender may charge. Additionally, a pre-approval expires after a certain amount of time. Check with your lender to see how long the pre-approval is valid. If you decide you want the benefits of a pre-approval, make sure you are really ready to buy a house. Otherwise, you will only be throwing money away.

Whether you choose to get pre-qualified or pre-approved, talking to a lender before you start searching for a house is a smart first step. You will have peace of mind knowing what price level home you can qualify for, and you can focus your search on the right home for you . Also, the seller will be thrilled to be working with a qualified buyer. Remember, CareOne Credit offers credit counseling services that will help you with debt management and obtaining pre-approval for your mortgage loan.

Take control of your finances with our debt help tools. Use our calculators and budget planner to help you manage your money.

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