1. Seeking a Loan without Pre-qualification
Not being pre-approved prior to shopping for a home is the number one cause of headaches and delayed closings. When shopping for a loan you have two options; to get a pre-approval or to simply pre-qualify. Pre-approval and pre-qualification are two different things. During the pre-qualification process, a loan officer asks you a few questions and provides you a "pre-qual" letter in good faith, based on the unverified
information you provided. This pre-qualification is 100% contingent on the information you provided being accurate; and is therefore unreliable as a true measure of your borrowing capability. The pre-approval process is much more thorough.
The National Association of Exclusive Buyer Agents says that it is an pivotal part of the process. - View full NAEBA report.
The pre-qualification process is conducted by a mortgage broker or institution to determine if you are financially capable of buying a home. Things such as gross annual income, credit history, debt to income ratio, and ability to pay are examined. You will be given a letter of pre-qualification at the end of this process. Pre-qualification determines the size of the loan you are capable of paying.
The seller knows you can close the transaction because a lender has carefully reviewed your income, assets, credit and other relevant information. In some cases (multiple offers, for example), being pre-approved can make the difference between buying and not buying a home. Some sellers - who may otherwise hold out for a better offer - will take a lower offer if they know the buyer can close on the property quickly. Additionally, if you are shopping for bank owned property or a property in short sale; the current mortgage holder will only discuss a sale of the home with pre-approved borrowers.
After it has been determined that you are pre-qualified, a pre-approval process is the next step. Here, the financial institution will determine if you qualify for the amount you wish to borrow. The mortgage company handles all the paperwork. No property has yet been identified.