However, understanding further details may aid the process of buying a home. Primarily, many get confused between “pre-qualification” and “pre-approval.” In short, pre-qualification is less formal. It includes discussing income, debt and other financial pieces with a lender. At the end of the conversation, the lender will be able to estimate how much a person could receive in a loan. This is not a guarantee; rather, it is an estimate based on the information given.

Pre-approval is a step beyond pre-qualification. The pre-approval process actually verifies a person’s finances and credit score and goes through an underwriting process. A person must submit pay stubs, tax returns, bank account statements and W-2s, along with other applicable financial documents. Upon completion of this and the mortgage application, the potential buyer receives a letter stating the pre-approval amount.

We find it helpful for potential buyers to complete the pre-approval process for a couple of reasons. First of all, knowing the amount a person may afford allows buyers to look at homes most suited for them. Instead of looking over or under a pre-approved price range, buyers may seriously consider homes in the correct price range.

We have had situations where clients are pre-qualified for a certain amount, but after the pre-approval process, they realize they are actually approved for a higher-priced home, and of course, we have had clients who were looking at homes higher than they should consider.

By obtaining pre-approval, buyers may maximize the time looking at well-matched properties and minimize the time waiting for a loan approval in this scenario.

Additionally, obtaining pre-approval places a buyer in a stronger position. For example, if a seller receives two similar offers, one of which is pre-qualified and one that is pre-approved, the likelihood is that the seller will select the pre-approved offer, as it is more secure. The closer an offer is to the approval process, the stronger it becomes. The highest-quality offer is a cash offer. Without a loan-approval contingency, the pre-approval is the next best thing.

In general, understanding these differences allows buyers to navigate the process of buying a property more smoothly. It also allows sellers to identify the differences between potential offers.

The importance of the interest rate is significant. The general rule of thumb is that a 1 percent interest rate increase results in 10 percent lower purchase power. As interest rates remain at an all-time low, the lending process is important to understand, as it has such an impact on buying a home and allows buyers to maximize their purchase price.

Don Ricedorff is a Realtor at The Wells Group in Durango, and a past president of the Durango Area Association of Realtors. He can be reached at [email protected].