A strong, ready-to-act buyer takes two steps before house hunting gets serious: gets pre-qualified, then gets a pre-approval letter from a lender. Your pre-qualification is an unofficial snapshot; your pre-approval is the lender's official (though not yet binding) word on how much they'll lend you.
A pre-approval letter puts you in a strong buying position. In a market where more than one buyer is putting in an offer on the same house, an offer with no pre-approval attached doesn't stand much of a chance against a cash buyer or a buyer who's already pre-approved.
Pre-qualification should come first — if those numbers look right, move on to pre-approval. Pre-qualification isn't official; pre-approval either confirms you're solid or surfaces issues you may not have known existed. Some brokers, with seller permission, won't even present an offer unless a pre-approval letter comes with it. Before you get deep into house hunting, know your real buying power.
You provide a snapshot of your financial situation, verbally or in writing. A lender (or an agent) applies ratios to those numbers to estimate the mortgage amount you'd likely be approved for — done through a lender or mortgage broker, it carries a bit more weight. Once you're pre-qualified, your agent can start setting appointments while you begin step 2 in parallel.
If pre-qualification comes back in an acceptable range, move on to pre-approval. Here you provide the lender with actual documentation of your finances, and they officially verify everything, including a full credit check. If you pass, the lender issues an official approval for a specific amount — this doesn't bind them to lending it. If your financial situation changes afterward, the whole approval process may have to restart.
The advantages of pre-approval are significant: you'll know your true buying power without wasting your time, your agent's time, or the seller's time. If you find the right house, your offer is considered stronger than a non-pre-approved offer — sellers will often choose an already-approved buyer over one offering more money without approval. Against a cash buyer, a pre-approved offer carries similar weight. And most of the mortgage paperwork is already done by the time you make an offer.
- Don't make any large purchases.
- Don't buy or lease a new car — or a new boat.
- Don't open or close credit lines.
- Don't accept a large cash gift without notifying your bank first and getting their feedback.
- Don't do anything that changes your credit situation.
- A parallel job change can be fine, but talk to your point of contact before you make the move — changing jobs can affect your approval.
- Don't change banks or financial institutions without checking with your point of contact first.
Any of these changes after you're pre-approved can force the whole approval process to restart.
Almost all lender commitment letters are for a specific property, contingent on that property's appraised value versus the loan amount (the Loan-to-Value Ratio, or LTV), the property's condition, timelines, and any other requirement the lender includes. That's normal. One of the contingencies is always that the property appraises within an acceptable LTV — if it doesn't appraise, you have options (below).
LTV is the percentage of the appraised value that makes up the loan — a measure of the risk a lender takes on. If a buyer defaults, the lender expects the mortgaged property to hold enough value to recoup their money.
Worked example: a $60,000 deposit on an agreed price of $600,000 puts the LTV at 90% and the loan at $540,000 (excluding loan costs). If the lender's appraisal instead comes back at $500,000, the LTV becomes 108% — if the buyer defaults, the lender has no realistic way to recover what they lent, since the property isn't worth enough to cover it. The lender won't fund the loan at that price without a change to the deal.
A commitment letter is issued only after (1) a sales contract signed by all parties, and (2) the lender's appraisal is complete.
If a property doesn't appraise at the contract price, there are four ways forward:
- The buyer puts more money down.
- The seller lowers the price.
- Both sides contribute to close the gap.
- Or the buyer walks away.
It's actually common for buyers to willingly pay more than appraised value, for a variety of reasons. On the other hand, many people read a low appraisal as a warning that the price was off. How much it matters often comes down to down-payment size: with 50% down, even an appraisal well below the purchase price usually won't stop the lender from funding the loan, because their risk is already well covered. Under 25% down, a low appraisal becomes a real hurdle to funding.
A good buyer's agent should evaluate whether a property is priced right regardless of deposit size — but it matters even more once you're putting down more than 25%. Your lender doesn't care if you overpay, as long as they can recoup their money if you default; the appraisal is simply the checkpoint that determines whether they will.
Clear to close is the moment every contingency in the lender's commitment letter has been satisfied — you're ready to be funded.
If you're a cash buyer, don't rely on automated online pricing models. Get a Broker's Price Opinion or an independent appraisal, and include an appraisal contingency in your offer even if you don't ultimately have an appraisal done. Whoever represents you should know what they're doing when it comes to pricing a property correctly.