For Buyers who need financing to purchase a home, the home purchase contract may give them some time to get a “Loan Commitment” or “Loan Approval.” The Buyer must get either of these before the Loan Contingency Deadline.
In addition to these terms, there are other terms that often get thrown into the mix, and that are helpful to understand. There is some variation across lenders, and the definitions below may not fit all lenders.
Pre-qualification means that the lender evaluated the potential borrower’s financial picture based only on information the borrower provided, and indicated the mortgage amount for which the borrower could possibly qualify. The lender has not reviewed the potential borrower’s credit, or any other supporting documentation.
Pre-approval is a different term and is somewhat more involved. To get pre-approval, the lender verified the potential borrower’s financial background, checked their credit, and reviewed the mortgage application and other supporting documentation. If pre-approved, the lender can provide the potential interest rate that the borrower would qualify for and may also allow them to pre-lock a rate.
Although a borrower may get a “Pre-qualification” or a “Pre-approval,” it is the Loan Approval or Commitment that are really the important benchmarks when it comes to the loan contingency deadline.
A borrower will therefore want to discuss with their lender what is required to get documentation that assures that the lender will provide financing.
A lender may not want to discuss appraisals or final underwriting until it gets closer to closing. This can be an area of contention between the borrower and the lender. If the lender has not finished underwriting, but has issued the approval or commitment, the borrower may be on the hook to purchase the house even when the bank is not yet fully committed to funding.
For this reason, we suggest that borrowers discuss the issue with an attorney if their lender is not willing or able to give them a satisfactory commitment or approval.