Pre-approval is a preliminary assessment by a mortgage lender of a potential borrower’s creditworthiness and financial capacity to obtain a loan for a specified amount. This evaluation is based on the borrower’s credit history, income, employment status, and debt-to-income ratio, among other factors. A pre-approval is typically provided in writing and serves as a conditional commitment, subject to further verification and property appraisal.
Related Real Estate Terminology
- Mortgage: A loan secured by real property, used to finance the purchase of a home or land.
- Credit Score: A numerical representation of an individual’s creditworthiness, based on their credit history.
- Debt-to-Income Ratio (DTI): A percentage calculated by dividing an individual’s total monthly debt payments by their gross monthly income.
- Loan-to-Value Ratio (LTV): A ratio comparing the amount of a mortgage loan to the appraised value or sales price of a property.
- Pre-qualification: An initial assessment of a potential borrower’s eligibility for a mortgage based on a general overview of their financial situation.
- Underwriting: The process of evaluating a borrower’s creditworthiness and the risk associated with a loan before approval.
- Closing Costs: Fees and expenses paid by the buyer and seller during the closing process of a real estate transaction.
References
- Guttentag, J. (2018). The Mortgage Encyclopedia: An Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls (2nd ed.). McGraw-Hill Education.
- U.S. Consumer Financial Protection Bureau. (n.d.). What is the difference between a mortgage pre-approval and a mortgage prequalification? Link
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