It’s important to understand the difference between a mortgage pre-qualification and a mortgage pre-approval. Many homebuyers think of these as interchangeable terms that mean the same thing. But they’re actually quite different, and could ultimately play a role in whether the seller accepts your offer. You’ll want to obtain both pre-qualification and pre-approval before you begin your home search.
This should be your first step in the home-buying process. A pre-qualification is free, relatively simple and straightforward, and can be done online or over the phone. The bank or lender will require some basic information about your income, debt, and assets, and use that to provide a written statement of the loan amount you would qualify for under their guidelines.
Pre-qualification does not usually include a credit check, so the lender won’t look into your credit report. Still, Zillow notes that “it is a good idea to review your credit report early in your home search to catch any errors and identify areas that you can improve,” as your credit score will come into play during pre-approval.
Getting successfully prequalified does not mean that you’ll automatically get a mortgage loan. It just provides an initial snapshot of your overall financial picture. It’s a good opportunity for you and your lender to discuss any potential problems, and to go over the kind of mortgage that’s right for you.
The pre-approval phase is much more involved. You’ll complete a mortgage application (there is usually an application fee ranging from $75 – $300), and submit documentation for an extensive financial background check and credit check. Once completed, the lender will provide a written statement with conditional approval of the exact amount you qualify for, along with the interest rate you can expect. Pre-approval letters are usually good for 60 – 90 days.
There are several reasons to go through the pre-approval process before you start your home search in earnest:
- You’ll know exactly how much you can afford. Going into your home search with a clear idea of what you can spend will save you time, energy, and emotion. It will also help you avoid the mistake of choosing a sub-optimal loan type.
- You can proceed quickly once you find your perfect home. Without pre-approval, your offer is conditional on obtaining financing, which can take some time. You may lose out to another buyer who is already pre-approved.
- Sellers will know you’re serious. Similar to the point above, having your financing in order before making an offer shows the seller that you’re credible and can move quickly once your offer is accepted. It gives you an edge in this competitive market.
Pre-qualification and pre-approval are very different. Pre-qualification is a necessary first step in order to give you the big-picture view of your financial situation and price range. Pre-approval is what you really need when you’re serious about your home search, because it provides exact figures and gives you credibility with sellers.
The experts at Lone Star Financing are here to help you with mortgage pre-qualification and pre-approval.