Pre-Approved Loans - What Is Loan Pre-approval, Pre-qualification and Loan Commitment?

If you have ever received a pre-approved loan in the mail, you may have wondered how you got approved without undertaking any test or requesting for the loan in the first place. In fact, some of the questions that runs through the mind range from how they got your personal details to how did they know they could trust you with a loan. The answer is that, before the lender sends you such a letter, they would have taken a careful look at your credit history.

Although, there are different types of personal loan pre-approval: pre approved home loans and pre approved auto loans, when searching for a home in particular, you will come across terms such as pre-approval, pre-qualified and loan commitment. These terms can be confusing but here's roughly what each of them mean:

Pre-qualified

Loan pre-qualification does not include an analysis of credit report. In fact you can choose to pre-qualify yourself or you can get your bank or real-estate agent to it for you. Essentially, with pre-qualification, you analyze your income and expenditure to determine how much you can afford. These figures are fed into a pre-determined formula to an with it you can have a general idea of the price-range you can afford.

Pre Approval

This is when, as mentioned above, the lender takes a close look at your credit history as well as your current income and expediture to determine if you qualify for a loan. If you do, you will be informed of the maximum amount of loan they can offer you. This will  give you the confidence to search within your knowing what buying power you have. It does not, however, guarantee that the lender will give you the loan.

Loan Commitment

Home loan lenders issues a loan commitment after the house you wish to buy has been appraised satisfactorily and you have been approved. The lender will generally want to know that the house in question can sell for a reasonable profit and also that it will sell within a reasonable amount of time should it be foreclosed. In addition, they may refuse to offer a home loan, if there are defects such as cracks, subsidence or wet basement in the property. If access roads are bad, that can also raise a red flag. Once you receive a loan commitment, you are on your way to acquiring your new home.

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