Definition of Pre-Approval
What does the term "pre-approval" mean as it applies to the world of real estate? What is the definition of the term "pre-approval"?
"Pre-approval" occurs when a lender guarantees that a potential borrower will be able to borrow a certain amount of money.
"Pre-approval" and "pre-qualification" are two different things. Many people who think that they have "pre-approvals" actually have "pre-qualifications" - there is a big difference.
With a "pre-qualification", a lender will check a borrower's credit history and income levels and "pre-qualify" them for a loan. For instance, a bank may say to a potential borrower, "based on the information that you have provided, you have pre-qualified for a mortgage of up to $500,000". Borrowers can use this information to go and try to locate a house that they would be interested in buying. Some borrowers will even take "pre-qualification" letters from their banks to try and gain an edge on other buyers.
The difference between "pre-approvals" and "pre-qualifications"? A "pre-qualification" is NOT a guarantee that a lender will actually lend you that money. For instance, if you offer $500,000 for a home that has been appraised at $225,000, a bank is very likely not going to grant you a mortgage. After all, you are taking out a secured loan (the house is the collateral), and the lender has to be satisfied that they could get their money back if you defaulted on the loan.
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