Definition of "Pre-Approval"

Tammy Cannon
  JP & Associates

A lender commitment to make a mortgage loan to a specified borrower, prior to the
identification of the property that will be mortgaged. On a pre-approval, unlike a pre-qualification,
the lender verifies the financial information provided and checks the credit of the potential
Prospective homebuyers seek pre-approvals because they believe it helps them in shopping for a house.
Lenders offer pre-approvals in the hope that the homebuyers receiving them will come back to them for
a loan after they contract to purchase.
The lender's commitment under a pre-approval is usually expressed in terms of the monthly mortgage
payment that the prospective buyer has the income to meet. Converting the mortgage payment into a
loan amount requires an assumption regarding the interest rate, which is not known at the time of the
pre-approval. Since the lender is not committed to an interest rate, an increase in rates could
reduce the approved loan amount.

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