What Is a Pre-Approval Letter for a Mortgage?

A home loan in which the lender finances the purchase of your home in exchange for a lien against the property, or conditional ownership, is called a mortgage, according to Business Dictionary. As you enter the real estate market as a serious home shopper, you should obtain a mortgage pre-approval letter, according to Marcie Geffner in her National Association of Realtor (NAR) article "Don't Forget Your Pre-Approval Letter."

Basics

• Pre-approval letters are sometimes confused with pre-qualificaiton letters. However, pre-approvals are a much more "thorough analysis of your credit, income and assets", according to the Home Buying Institute article "Buying a Home: Lender Letters" by Julia Jalone. Pre-approval letters are for a specific loan amount, while pre-qualification is just a simple screening of loan eligibility.

Contents

• Pre-approval letters usually contain a few specific items, but a stated loan amount is of prime importance, according to the Broker Outpost article "What Should a Pre-Approval Letter Contain?" A letter should also be dated and have an expiration date. Some include interest rate and mortgage payment information. Real estate agents often require an updated letter if your letter is over 30 years old.

Pre-Approval Benefits

• A major benefit of a pre-approval mortgage is that you will have a good idea of how much mortgage and home you can afford. This gives you confidence in shopping. The NAR notes that a pre-approval letter gives you more negotiation power with sellers. Sellers want to protect themselves and a pre-approval letter solidifies your value as a prospective buyer. This can, in fact, help you get a better deal since your letter shows that you are a reduced risk to the seller.

Limitations

• The NAR notes that pre-approval letters do have limitations. They are not binding to the lender and are typically subject to an adequate home appraisal. Additionally, pre-approval letters are time sensitive as noted by the expiration date. Most importantly, the lender reviews your financial situation prior to actual approval of a mortgage, so if your condition changes after pre-approval, you may not get your loan.

Online Pre-Approvals

• Freddie Mac offers a word of warning to pre-approval hunters. With the growth of online mortgage companies, some unscrupulous entities exist. Some scam artists portray themselves as reputable mortgage lenders but are really looking for your personal information. Not only is your personal information at risk if you connect with a non-reputable provider, but your home buying process might be delayed.