Borrowers looking to buy a large purchase like a house or a car should be excited once they receive pre-approval. This step in the process of borrowing money occurs after a term sheet is provided and negotiated.
Pre-approved loans are loans and terms that lenders create for borrowers. Lenders must pay this amount to the lender if they accept the pre-approval and find a home or car under the specific conditions provided. It is important to get pre-approved for large purchases and borrowed amounts because constant changes may occur.
Contrary to popular belief, although borrowers may be pre-approved for a loan amount, interest rate, and term, there is still room for negotiation. The pre-approved amount is the maximum loan a person can acquire, but it can still be changed. If conditions change, such as a loss of a job or a debt acquired, the lenders may choose to change the pre-approval or cancel it completely. It is not entirely set in stone and does expire.
Also, when a person is pre-approved for a loan, they have an idea of what their true budget is. Because pre-approvals are binding to borrowers, they must release the funds once a contract is signed and a house or car is bought. This makes the process easier for borrowers looking for a large purchase. Instead of blindly hoping that they can afford a home or car, there is a maximum amount that is set for bidding on homes and purchasing cars.
Borrowers should be wary, though. Pre-approvals on loans can damage credit reports and flag some loan providers as a cause of worry. Applying for pre-approvals should be limited by borrowers to ensure that their credit scores are not negatively affected.