What is a “pre-approval” in real estate financing?

A "pre-approval" in real estate financing refers to an estimation from a lender of how much a borrower can borrow. This process entails a lender reviewing the borrower's financial information, such as credit score, income, and debts, to determine the amount they are likely to qualify for in terms of a mortgage.

This pre-approval is a crucial step for potential homebuyers as it gives them a clearer understanding of their budget and strengthens their position when making an offer on a property. It signals to sellers that the buyer is serious and financially capable, potentially giving them an advantage in a competitive market.

While a pre-approval involves some level of lender commitment, it is not a guarantee of loan approval. The final approval is contingent on further detailed assessments and the property appraisal, which is why it differs from outright guarantees of financing.