Pre-Approval vs Pre-Qualification
So, you’ve finally made the decision and decided that you are ready to apply for your very first home loan. Exciting!
Along the way, you will hear a slew of terminology that you might be unfamiliar with, such as:
- Closing costs
While those terms are important to know (and enough to make your head spin), there are two terms in the bunch that you shouldn’t get confused, and those terms are:
Pre-approval and Pre-qualification
What’s the difference?
The pre-qualification and pre-approval are two steps in the mortgage application process that most borrowers will go through.
Truthfully, there aren’t many distinctions between the two. A pre-qualification and pre-approval will tell how much your lender is willing to give you, under certain conditions.
Your lender will provide you a pre-qualification and pre-approval letter listing these conditions and the dollar amount they are agreeing to lend you.
However, just because you pre-qualified or were pre-approved, does NOT mean you are granted the loan.
Below will highlight the main differences between the two:
The pre-qualification is the initial step in the mortgage process and is quite simple. It’s an estimate of what you might be able to finance.
With a pre-qualification, you provide your mortgage lender a look inside your financial situation – including any assets, debts, and income.
The downside is that you only receive an estimate of what you can afford because your lender must still check your credit score.
This could mean a slight inaccuracy in your estimate and that’s the risk you take with a pre-qualification.
Hint: Just because you prequalify for a certain mortgage size or program does not mean that it’s the best choice for you.
Getting pre-approved is the route most borrows take. The pre-approval process begins when you and your mortgage lender review your credit report and calculate your debt-to-income ratio.
Your mortgage lender will either ask for your permission to access or provide the following:
- The last 2 years of Federal tax returns – to prove consistent income and job stability.
- Recent bank statements – to show your current financial situation.
- W2 forms – to show that through your income, you can afford monthly payments.
- Credit report – to show your credit history and determine the risk of lending.
Lenders need this information so they can accurately determine your eligibility and give you a close estimate of how much you can finance.
Before you visit your mortgage lender, make sure you bring these documents so your application process is a breeze.
Why should I get a pre-approval or pre-qualification?
To know how much you can borrow!
As a buyer, pre-approval will give you the upper hand in the market, sellers will take you more seriously when they know you can make a legitimate offer.
Some sellers might request a pre-approval letter from potential buyers.
This letter shows sellers that interested buyers are serious about purchasing a home and lays out the dollar amount they have been approved of.
If you’re not convinced already, here are the top reasons to get one:
You wouldn’t want to find a home that has everything you’re looking for only to realize that it’s of your price range.
A pre-approval will help you save time and avoid looking at homes above your price range.
Real estate brokers prefer to work with a buyer that has a pre-approval in hand because they know it will decrease the chances of the deal falling through. All parties involved know what you can afford, which keeps everyone on the same page.
Higher acceptance rate
Once again, a seller will take you as a serious buyer if you show them a pre-approval.
In addition, a pre-approval might give you a little more room to negotiate, meaning the seller might lower the asking price or help with closing costs to work with a pre-approved buyer.
Both the seller and buyer are assured that the money will be available when the time comes.
Without a pre-approval in hand, you will spend more time searching for a home, and even worse: you might be turned down when you finally make an offer because another buyer prepared with a pre-approval snagged the deal.
Spare yourself the stress and speak with your mortgage lender about getting a pre-approval beforehand.
You don’t have to borrow any money when you get pre-approved. The point of a pre-approval is to get the necessary information and bargaining power to get the home you are looking for.
Here are some advantages of a pre-qualification (they are generally the same):
Fast and simple
Because your mortgage lender will only assess the surface of your financial situation, the process will be quick and easy. Also, it can often be done online.
Your search through real estate will be more focused, allowing you to assess available homes in your market efficiently.
With a better focus, you can find the right home sooner and take advantage of the low mortgage rates.
Offered at no cost
Many lenders offer a pre-qualification at no cost, which is great when you will need to save that money for your home.
You can always run the numbers yourself to see how much home you can afford using online calculators, but if you want to be 100% accurate, then meeting with a mortgage lender is your best bet.
Once your mortgage lender gives you the green light, you will need a letter to show sellers your worthiness.
If you take away anything from this, know that a pre-approval and a pre-qualification are not the same things. Don’t assume that you’ll get a home loan because you have either one. That mistake could ruin your chances of getting the home you want.
Pre-qualification is an estimate of how much you could be eligible to borrow.
Pre-approval just shows that your lender is ready to work with you on a mortgage loan based on the financial information provided.
You want to be confident in your home search and taking these steps beforehand can certainly give you a boost.
If you are looking to find the home of your dreams in a reasonable amount of time and eliminate some of the tough competition, then consider getting a pre-qualification and pre-approval to increase your chances.
Your agent will be grateful you did, and so will you.