Like a lot of the real estate business, the mortgage business uses words that sound great but don't mean what they sound like they mean. A phrase like this is "prequalification for a loan."
A Possible Trap: Loan Prequalification
If you've ever looked for a house, you know all the fun ways people talk about their homes. The word "cosy" can be used to describe a house that is mostly a closet with a bathroom. A "rustic" house is often so old and broken down that scientists study it to see if it is breaking the laws of physics by still standing. I am sure you can think of a few of your own.
In the world of mortgages, loan prequalification is an interesting thing to do and a cool phrase. A buyer goes to a lender before looking for a home and tries to find out how much they can borrow. The lender asks you a few questions and might look at your pay stub. The lender rep then says that the buyer has already been approved for a certain amount. With the letter in hand, the buyer goes out to find the perfect property.
Even though all of this sounds good, there is a big problem. A lender's prequalification decision isn't worth the paper it's printed on. Prequalify can be done by anyone. The lender hasn't really decided anything. All they did was give you a piece of paper in hopes that you will come back and apply for a loan with them. The bank hasn't gone through any of the criteria it uses to decide whether or not to give a loan, so it has no value. For all it's worth, the dollar amount mentioned in the letter might as well be for a billion dollars. The prequalification letter doesn't make the bank do anything.
As you might expect, this situation is a trap for some buyers. When they get the prequalification letter, they think they will get a loan for the amount in question. Then, they buy something based on the number. Imagine how surprised they will be when the bank turns them down or gives them less money than they asked for. They fell into the trap, and now they will lose the earnest money deposit they put down on the house. Every day, this takes place.
Prequalification letters for loans don't do anything, but pre-approval letters do. A pre-approval letter and a prequalification letter do the same thing. The difference is that you have to go through the whole process of applying for a loan. The bank then makes a final decision and tells you how much you can borrow. The bank has to honour the pre-approval, but usually only for a short time, like 30 days. If you get a pre-approval letter, sellers will be more likely to take you seriously when you make an offer.
Remember that pre-approval, not qualification, is the magic ticket when it comes to mortgages.
