Definition of "Pre-Approval"

Tammy Cannon real estate agent

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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 borrower. 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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