At first glance, getting pre-qualified and getting pre-approved for a mortgage seems like the same thing. Both refer to an amount a lender would be willing to loan you. Both assess your financial background to determine your creditworthiness. However, there are key differences between the two concepts that may impact your preparation to buy a home.
Pre-qualification is the first step of the mortgage process. It is a cursory look at your financial situation, allowing it to be relatively quick and able to be done online or over the phone. You provide the lender with basic information about your income, assets, and debts, and the lender performs a credit evaluation, giving you a ballpark estimate of how much money you may be able to borrow. Remember, a pre-qualification is based on the information you provide to the lender and it has yet to be verified. You have no guarantees with a pre-qualification.
Loan pre-approval is more involved and in-depth than a pre-qualification. For starters, you will need to complete a mortgage application. A full financial background check will be performed with an underwriter reviewing 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 can shop for a home with a defined price range in mind. With a pre-approval, your loan depends only on the home appraisal, 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. Knowing exactly what you can afford narrows your home search parameters. The ceiling given by your lender automatically weeds out any homes above that limit, helping you focus on what’s within your true price range. A pre-approval gives you a home buying advantage by signaling to the seller that not only are you willing to buy the home, but you have the means to do it as well. Pre-approval means you can move fast 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. Know the difference between these two home buying concepts and leverage them to your advantage. Before you know it, you’ll be moving into your future home!