A mortgage pre-approval letter is a letter from a mortgage lender stating that a prospective home buyer's finances have been evaluated and verified by a mortgage professional and that the prospective home buyer has been pre-approved to borrow a specific amount of money in the form of a mortgage loan. The letter can be a very important component of successfully buying a home. It not only provides the prospective home buyer with assurance that he will be able to obtain a mortgage, but it also allows home sellers to more effectively consider bids, as it can help confirm the credit-worthiness of a bidder as well as the chances of the home purchase actually going through.
When someone wishes to purchase a home or other piece of real estate, she may choose to begin her quest by first ensuring that she is financially capable of obtaining a mortgage. In such cases, she will visit a mortgage lender and bring along financial documents that give an accurate picture of her income, debts, and credit. With the prospective buyer's permission, the mortgage lender will begin to investigate this information in order to ensure its validity. If it appears that the borrower is indeed worthy of a mortgage, the lender will typically issue her a mortgage pre-approval letter that states the amount of money she can expect to be able to borrow. Both home buyers and sellers should be aware, however, that the issuance of a mortgage pre-approval letter does not guarantee that a mortgage will actually be approved, as both the buyer's financial situation and the lender's criteria may change before a home purchase actually occurs.
One significant advantage of obtaining a mortgage pre-approval letter prior to beginning a home search is that some real estate agents are suspicious of working with clients who have not established that they are even capable of securing a mortgage. As real estate agents work on commission, it doesn't make sense for them to work hard on behalf of someone who will never actually bring them a sale. In fact, some real estate agents as well as home sellers will not seriously consider working with someone who does not yet have a mortgage pre-approval letter.
Some potential home buyers become confused about the difference between a mortgage pre-qualification letter and a mortgage pre-approval letter. Although they may sound similar, the processes of mortgage pre-qualification and pre-approval are very different. When an individual pre-qualifies for a mortgage, he simply submits certain pieces of financial information to a mortgage specialist or even an online program for an assessment of the amount that he can hope to borrow when purchasing a home. There is no verification of this information in the pre-qualification process, unlike the rigorous investigation that takes place when issuing a mortgage pre-approval letter. As a general rule, buyers who are concerned about having their offers taken seriously by home sellers should obtain a pre-approval letter rather than a pre-qualification letter.