As with much of the real estate industry, the mortgage industry uses terms that sound splendid, but really are not what they sound like. The loan prequalification is such a phrase.
Loan Prequalification – A Potential Trap
If you have shopped for a home, you know all the interesting terms public use to give reasons for their property. A cozy home can be translatedto mean the home is in effect a closet with a bathroom. A rural home often earnings the place is so decrepit, scientist study it to see if it is breaking the laws of physics by left over upright. I am sure you have more than a few examples of your own.
In the mortgage planet, loan prequalification is an activity and phrase that is interesting. The basic idea is a buyer goes to a lender prior to shopping for a home and attempts to determine what they can borrow. The lender does a cursory interview and maybe looks a paycheck stub. The lender representative then declares that buyer is prequalified for a certain amount. With letter in hand, the buyer heads out to find that unique property that is just right.
While this all may sound splendid, there is a serious problem. A prequalification determination by a lender is not worth the paper it is written on. Anyone can get prequalifed. The lender has really made no determination. All they have done is give you a piece of paper that they hope will get you to come back and actually apply for a loan with them. The bank hasn’t actually run even if any of the criteria it uses to enter a loan, so there is no value to it. The dough figure quoted in the letter might as well be for a bazillion dollars for all it is worth. The prequalification letter is not binding on the bank.
As you can imagine, this scenario represents a trap from some buyers. When agreed the prequalification letter, they assume they will get a loan for the amount in question. They then make a purchase based on the figure. Imagine their surprise when the bank subsequently rejects their application or approves them for a lower amount. The trap has closed on them and they will lose their earnest cash deposit on the real estate transaction. This happens each day.
Loan prequalification letters are a waste of time, but pre-approval letters are another topic. A loan pre-approval works the same way as a prequalification letter. The variation is that you actually go owing to the entire loan application process. The bank then makes a final determination and pre-approves you for a loan amount. The pre-approval is binding on the bank, but usually for a short cycle of time such as 30 days or so. If you obtain a pre-approval letter, sellers will be very receptive to your offers.
In mortgage, you must keep in mind that it is pre-approval, not qualification, that is the magic ticket.
Related video:
Easy Steps to VA Home Loan Prequalification | Maura Neill, REALTOR
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