PreApproved What Does It Mean Why Is It Important

Dated: 03/18/2019

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Pre-Approved: What Does it Mean & Why is it important


Pre-approved means you are approved for a mortgage loan up to a certain amount.  This is sometimes confused with with Pre-qualified.  There is a distinct yet subtle difference, which can be the difference between securing your dream home and heading back to search mode.


Getting Pre-Approved is Step 2 in the 7 Steps to HomeOwnership.  Click Here to Download Free Checklist: 7 Steps to HomeOwnership.


You will discuss your options with your Mortgage Lender.  To learn more about this persons role, please read Meet the Team: Who are the Players?



Pre-qualified means you meet very basic requirements that are needed to qualify for a loan. Perhaps you’ve seen a postcard or other marketing from a bank or lending institution that states “You’re Pre-Qualified!” What they are telling you is based on information they already have about you (such as income range & credit score) they believe you would qualify for a mortgage.  You can also call your bank and ask if you are pre-qualified, they will ask you basic information including gross income, estimated debts and assets.  

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Based off this information, they can ‘qualify’ the approximate amount you would likely be approved for.  Note the vagueness of this language above, approximate amount you would likely be approved for once you go through the Pre-Approval process.

Pre-qualified means you can comfortably assume you will be approved and justifies the work of completing a full mortgage application to become Pre-Approved.  




The lender will ask you to gather the past 2 years financials, tax returns, proof of income, debts & assets for you and co-applicant.  They will also need to ‘hard pull’ your credit report, which puts a mark on your credit and best avoided if you are not already pre-qualified.


Once you go through this process, the banker or mortgage company will completely underwrite your file & can issue you are “Pre-Approval” letter. Some lenders even offer an “Underwriting Guarantee” that offers the seller a guarantee that they can close on the property, assuming the property appraises.

Why Pre-Approval is Important


The Pre-Approval letter makes every offer you present stronger.  It tells your broker, the listing broker and the seller that you have completed all the required steps to secure the financing to make the purchase.  All parties will consider your offer very serious, assuming your intention is to actually purchase the property.  

The Pre-Approval also confirms your upper price limit.  The amount listed on the letter is the most this specific lender will loan to you. Of course, you are not required to use all the funds available to you, but it does provide the upper limit with clarity and allows you to set your buying criteria with confidence.

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Freddie Mac lays out the advantages of pre-approval in the My Home section of their website:

"It's highly recommended that you work with your lender to get pre-approved before you begin house hunting. Pre-approval will tell you how much home you can afford and can help you move faster, and with greater confidence, in competitive markets."


One of the many advantages of working with a local real estate professional is that many have relationships with lenders who will be able to help you with this process. Once you have selected a lender, you will need to fill out their loan application and provide them with important information regarding "your credit, debt, work history, down payment and residential history."


Freddie Mac describes the 4 Cs that help determine the amount you will be qualified to borrow:


  1. Capacity: Your current and future ability to make your payments

  2. Capital or cash reserves: The money, savings and investments you have that can be sold quickly for cash

  3. Collateral: The home, or type of home, that you would like to purchase

  4. Credit: Your history of paying bills and other debts on time




If you are just starting the process, contact your mortgage broker and tell them you’d like be pre-qualified for a mortgage.  They can do this over the phone or online.  If you are pre-qualified, have decided the buying makes more sense than renting, and you’d like move forward with purchasing a home, THEN request an application to start the Pre-Approval process.


Continue Reading: Step 3 of 7 Steps to HomeOwnership: Explore Neighborhoods


Continue Reading:  Why Do Interest Rates Matter?

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Marco Murad

Off Market Specialist. Specialties: Buyer's Agent, Listing Agent, Relocation, Commercial R.E. I'm a real estate consultant who's made a career of an excellent track record of outstanding results an....

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