For first-time homebuyers, getting pre-qualified and getting pre-approved for a mortgage may seem like the same thing. Both terms relate to an amount a lender would be willing to loan you. Both take into consideration your financial background to determine how credit worty you are. Nevertheless, there are key distinctions between the two concepts that may affect your preparation to buy a home.
The Pre-qualification stage is the first step of the mortgage process. It is a quick, high-level look at your financial situation, allowing it to be relatively fast and able to be done over the phone or online in most cases. You provide the lender with basic information about your income, assets, and debts, and the lender performs a credit evaluation, providing you with a ballpark estimate of how much money you may be able to borrow. Keep in mind, a pre-qualification is based on the information you provide to the lende, which has yet to be verified. The are no guarantees when it comes to a pre-qualification.
The loan pre-approval stage is more complex and in-depth than the pre-qualification. For starters, a mortgage application must be completed. An underwriter will perform a full financial background check and review your credit report, pay stubs, bank statement, tax information, assets, obligations, etc. After assessing your creditworthiness, the lender will issue a pre-approval letter telling you what loan amount you are qualified for. At this point, you have the option to shop for a home with a defined price range in mind. With a pre-approval, your loan is dependant only on the home appraisal value, as well as your financial situation.
Why Do Either?
While neither process is necessary to purchase a home, pre-qualification and pre-approval can help you be more successful in your home search. When you know exactly what you can afford, it narrows your home search parameters and prevents you from shopping out of your budget. The ceiling given by your lender automatically weeds out any homes above your spending limit, helping you focus on what’s within your actual price range. A pre-approval gives you a home buying advantage by indicating to the seller that not only are you willing to purchase the home, but you have the means to do it as well. Pre-approval means you can move quickly when you find your dream home. In a competitive market, that can make or break a sale. Sometimes sellers even select a buyer specifically with this in mind. With these tools at your disposal, you will be prepared to secure the loan you need to buy your home. In addition to that, you can use pre-qualification and/or pre-approval to make a move in closing on the best home for you. Understanding the difference between these two home buying concepts enables you to leverage them to your advantage. You’ll be moving into your dream home before you know it!