What is the difference between a pre-qualification and a pre-approval letter?

While both terms refer to a letter given to you by your lender indicating how much they would be willing to lend to you they are very different.  Both of these letters will provide useful information but are not guaranteed loan offers.   

Pre-qualification is the first step in obtaining a mortgage.  This is solely based on information you have provided to your lender regarding income, debt, and credit.  Pre-qualification letters are written based on unverified information so not considered solid proof of financing.  

The pre-approval process takes this a step further.  In order to get pre-approved you will need to fill out a formal application for mortgage.  The loan originator will run an extensive check on your financial background and credit rating.  They will also ask you to provide documentation verifying the information provided for both your pre-qualification and mortgage application.  At this point the lender will be able to determine what mortgage loan program is best for you and give you a better idea of what interest rate you will be charged.  When this process is finished you will receive a conditional commitment in writing providing an exact loan amount.  Having this letter will put you at an advantage when looking for homes.  Many sellers will want proof you are a solid buyer who can afford to purchase their home before negotiating.

Do I need to talk with a lender before looking for homes to purchase?

Yes!  There are many reasons why you should talk with a bank and get pre-approved before looking at homes.  The biggest reason being that a mortgage lender can help you understand exactly how much you can afford.  You will only hurt yourself by looking at homes above your budget as it can be really hard to come back  to reality of your budget after you have seen homes you cannot afford.  A mortgage lender can also help you determine what loan program is the best for you, especially if you are a first time home buyer.  There are many programs available that can even offer grant money back in the right situations.  Not only will consulting with a lender will determine the best mortgage program for you but they will give you an understanding what the costs are associated with buying a home.  Be prepared!

What kind of documentation will I need to provide my lender when getting pre-approved?

Your lender will provide you with an exact list of what documentation they will need to process your loan.  However, this checklist is a good start and will help you prepare to ensure your mortgage application goes smoothly. 

W2's from current and past employers
Pay check stubs
Bank Statements
Last 2 years of tax returns
List of your debts
List of all your assets
Proof of timely rental payments and/or utility bills
Credit Report
Divorcee decree (if applies)

What are closing costs?

Closing costs refer to the fees that are paid when a home is purchased and the closing is finalized.  Both buyers and sellers will have closing costs paid to the people who help facilitate and successfully close the transaction.  When buying a home your mortgage lender will provide you with a good faith estimate in advance of your closing for your review.  If you are selling your home your real estate professional will review an Estimate of Proceeds worksheet detailing the costs involved in selling a home with you.  This worksheet will also estimate the amount of proceeds you will walk away with once the sale if finalized.