If you are in the market for a new home and have chosen to work with real estate agent, one of the first things you will be asked is whether you plan on paying cash or financing. If you are financing, the next question will be whether or not you are pre-approved.

The pre-approval/pre-qualification process is designed to let everyone involved in the transaction know that a lender has reviewed your financial situation and approved you to purchase a particular house. Thus, a buyer with a pre-approval letter in hand is a much stronger candidate than a buyer who is not pre-approved. In the housing industry, the terms "pre-approval" and "pre-qualification" are often used interchangeably and may be mistaken for the same thing.

In recent years, mortgage guidelines have been tightened. Documentation requirements have been expanded and followed more closely. A pre-approval gets you through the process and uncovers potential pitfalls long before you become obligated by a contract to purchase. You'll be certain about the price range that's best for you. You'll know how much cash you'll need to close, and you'll know your maximum monthly payment. Understanding your limits will help you negotiate with confidence. Plus, since sellers like a sure thing, you'll have an advantage over buyers who may not have been through the process.