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Many real estate agents, as well as buyers in general, have the understanding that "pre-approval" and "pre-qualified" are the same and equally sufficient. You will soon discover they are not, and whether you are buying OR selling real estate, it would be prudent to fully undertand the difference between the two.

Many financial institutions are willing and able to provide customers and potential customers with written letters of either pre-qualification or pre-approval. These letters written for potential buyers of real estate by the potential lenders may be the most significant action taken by a buyer to negotiate the best price for the property of choice.

Pre-qualification: A person can fill out an application for a loan, listing their income, list of assets, and monthly debt obligations and without having a house in mind or even a contract to purchase a home, the buyer can be provided with a letter from the bank which can indicate that the buyer is pre-qualified to buy a house up to a certain amount of money. This is a simple process and can usually be done within 24 hours. In some cases, it can be done right over the phone or online.

The pre-qualification letter, however, does not guarantee that the lender will ultimately provide a loan to the applicant as the pre-qualification is usually contingent upon verification of all the information provided by the applicant. And, unfortunately, for some applicants, the income stated in the application could not be verified. Or, the applicant forgot about some debt or unpaid collection or lien that was subsequently found on a credit report.

The pre-qualification can help a buyer negotiate a better price and can be helpful in the buying process, but it does not carry the same weight as a letter of pre-approval by a financial institution.

Pre-approval: This process is much more detailed. A potential buyer can request pre-approval by taking the initiative in providing the financial instituation with all the elements necessary in processing a loan to buy a house. Usually these elements include a buyers approval to pull a credit report; 2-3 years of most recently filed income tax returns; 3-12 months of bank statements; most recent pay stubs; evidence of cash-on-hand if not already deposited with the financial institution; and, of course, a completed loan application. These are some of the basics, however, there may be other items necessary depending on the type of loan the applicant is seeking.

Some lenders can provide an approval letter within an hour or two of receiving and verifying all the data provided by the applicant. However, for many applicants, it is wise to take further steps prior to visiting with a lender. At this point, I'd like to share the Green Beret's 7-P Principle: Proper Prior Planning Prevents Pitifully Poor Performance. The actions taken by buyers prior to applying for a loan to buy real estate may be so significant that the simplest things can SAVE or COST thousands of dollars between the borrower and the lender.

Hold on. Stop right there and take a moment and think about this for a moment. First, I have provided some information for buyers of real estate that if the buyer takes some pre-emptive initiative before seeking the property of their choice, that buyers can save thousands of dollars from negotiating the best price of their choice property. Second, there are thousands more that can be saved in closing costs and interest rates that are paid to the lender at closing and during the term of the loan.

If you have not yet been introduced yet, then please let me introduce you to Fair Isaac, Equifax, TransUnion and Experian. These are the biggest players in determing the overall credit report most, if not all lenders will use before approving any loan to purchase a home. Anyone can request a free credit report annually from each of the credit reporting agencies and as a minimum, it is important to review these credit reports annually as a minimum.

Regardless of whether or not a buyer thinks they have good, bad or no credit, it is wise to know where one stands prior to applying for a loan. More and more lenders are looking at FICO scores and based upon these scores, the interest rates and closing costs can fluctuate significantly. The difference between a score of 695 and 700 can be a 1/4 of a point to 1 point of interest charged on the term of a loan. Translation? $4,000 to $16,000 additional interest charged on a 20-year note. And, a credit score of 695 might be considered by some to be a fairly good score.

The score that is pulled at the time of loan application is probably the score that will be used to determine the interest rate and generally, an improvement of that score from the time of application to the time of closing may not necessarily qualify the borrower for a better interest rate. On the other hand, a credit score that drops after application can have such devastation as to put the borrower in a position where he or she might no longer qualify to get the financing desired to purchase the real estate of choice.

The fact is that a person can have a significant impact on their own credit score if they plan well in advance. How much in advance? Well, a 2-3 year plan is certainly best. However, even a month or two prior to a loan application can be enough time to improve a credit score 50 to 150 points depending on each individual circumstance. And, as noted in the situation above, even a 5 point score difference, in some situations can mean savings of thousands of dollars.

Summary: Planning ahead, taking pre-emptive action on credit scores, and getting pre-approved for a loan prior to negotiating the real estate of your choice can save thousands of dollars.

Choosing a Realtor®: I want to be your real estate agent. I want to help you, the buyer, save thousands of dollars in your next transaction. Your satisfaction means a great deal to me when you buy Maine real estate.