While you are preparing to finance your new home, you’ve probably come across the terms mortgage pre-qualification and mortgage pre-approval. But, what exactly does it mean to be pre-qualified or pre-approved for a mortgage and what is the difference between the two?
Let’s take a closer look at each of these terms to help you in the financing process and to help you decide which version is best for your situation.
The Similarities
Both pre-qualification and pre-approval can help determine the loan amount you’ll likely qualify for. This can help you narrow down the homes you want to look at so that you are only looking at those in your budget. This will also help you save the heartache of falling in love with a home that may be out of that budget.
Both can help show sellers that you are serious about purchasing their home, since you’ve already taken steps to get approved for a mortgage.
Pre-qualification and pre-approval letters help your offer stand out if it’s a seller’s market —again, because you’re a serious buyer who has already spoken with a lender.
Side note: Neither pre-approval nor pre-qualification is a guarantee that you will receive the loan from the lender and you are also not obligated to take out a mortgage from the lender you obtained pre-approval or pre-qualification.
The Differences
Pre-qualification is the first step in the mortgage obtaining process and pre-approval is considered the next step. Pre-qualification is where you supply an overview of your financial history to the lender such as income, credit score, debt and assets. The lender will then analyze this information and give you an estimate of how much you qualify to borrow.
Mortgage pre-approval is similar, but normally requires documentation and verification of your assets, income and debt as well as a credit check, which will be a hard inquiry on your credit report.
Which is Right for You?
The answer is really both! A pre-qualification letter is what you need to get in order to understand your basic price range/budget and also makes you stand out from the crowd on any offers you make. But, as soon as you’re ready to move forward, you’ll need to verify all the information you’ve provided to the lender (usually via documentation and a credit pull), which is the pre-approval process.
Obtaining mortgage pre-qualification and pre-approval from lenders is a great way to show sellers that you are serious. If you’re thinking about buying a home in the near future, be sure to connect with me!