The first step toward obtaining financing for a home purchase is to select a reputable, quality lender. The next step in the process is for you to obtain a pre-approval letter from that lender. Before I get to that, it is important to note that there is a significant difference between pre-qualification and pre-approval. Most buyers don't understand that there is a difference, but the difference is dramatic and not realizing this could have a significant impact on the outcome of your home buying efforts. Here is a brief explanation of the two processes:

Pre-qualification does not guarantee you a loan. It merely establishes how much you are capable of paying for a house, based upon what you tell a lender. Most lenders will provide a pre-qualification letter to almost literally anyone that calls them. Accordingly, sellers and listing agents view pre-qualification letters with a healthy degree of skepticism. As one very experienced agent stated it succinctly, pre-qualification letters are not worth the paper theyre printed on

Pre-approval, on the other hand, is a much more exhaustive process in which a lender will inspect your credit and financial situation in detail. This process guarantees you a specific loan amount. It also determines the types of loans for which you may qualify, your interest rate, your monthly payment amount, etc.

Why you need to obtain a pre-approval letter:

Because you need to understand your price range BEFORE you begin looking at houses. Simply put, you do NOT want to look at $400,000 homes if your upper price point is $350,000. Why? Because it is difficult to be content with a lower priced home if youve gotten used to homes beyond your financial reach

Because lenders can detect potential problems that might make obtaining a loan difficult. Credit report errors, high debt balances and an insufficient down payment may be corrected if discovered in a timely fashion. If credit problems are significant enough to keep you from obtaining conventional financing, its better to learn about it before you invest time in this emotional and often time-consuming process

Because you will need to provide the pre-approval letter along with any offer that you submit on any property, so you need to have the letter in hand at the onset of the home search process. The pre-approval letter is viewed as an integral part of any offer, and sellers and listing agents expect you to provide this. The absence of such a letter will be perceived quite negatively, and imply a lack of preparedness on your part

In conclusion, you should obtain a pre-approval letter before you start your home buying process. Its typically a fast and easy process, and the reasons for doing this are significant: pre-approval lets you know what you can afford before you become emotionally attached to something you cant, it helps identify and correct loan problems up front before the crisis hits, and it strengthens your ultimate bargaining position.