“Pre-qualified and pre-approved are not the same thing, but each plays their part in the home buying process.”
Whether you decided to shop for a new home today or months ago, you have inevitably come across the terms pre-qualified and pre-approved. Which one is better? Which one can help you get the best home for your money?
My answer may surprise you.
They both have their place depending on how far along you are in your home purchase.
Remember, lenders are in the business of obtaining clients and making money. Finding the one best suited to your needs, not theirs, is important. Start with pre-qualifying to feel out which lenders will provide you the best option for your purchase.
What Does it Mean to be Pre-Qualified for a Home Loan?
Pre-qualification is an initial evaluation of your credit worth. Often a pre-qualification can be done quickly. It serves to give a cursory overview of debt, income and creditworthiness. Your credit report is not evaluated and your debt and income are not verified.
You will be provided with an approximate mortgage amount that you may be able borrow from a lender. This is not a guarantee of financing and should only be used to gauge the amount of a home loan you may be approved for.
What Is the Purpose of a Pre-Qualification?
Pre-qualification will give you a better idea of your home buying budget. This information can help you narrow down your home purchasing choices. There is no use looking at that million dollar home if you won’t be able to obtain a mortgage close to that amount, right?
Another reason I recommend a pre-qualification is to try out a prospective lender. They will give you plenty of information on current programs because they want your business. After the pre-qualification, answer the following questions: Were you happy with the process? Did they explain their programs in detail? Are they a good fit for your needs?
A pre-qualification will also show your Realtor that you are knowledgeable about the amount of home you can purchase. They may be committed to working hard for you if they see how serious you are about the process.
Don’t be afraid to shop around. Once you choose a mortgage lender, you may be dealing with them for many years.
What Does it Mean to be Pre-Approved for a Home Loan?
A pre-approval is a more in depth process and generally takes longer to complete. A pre-approval is defined as:
“An evaluation of a potential borrower by a lender that determines whether the borrower qualifies for a loan from the lender, or the maximum amount that the lender would be willing to lend. The pre-approval process involves a thorough look into the income and expenses of the borrower, including a look at the borrower’s credit report and score.”
You will apply for a pre-approval with a mortgage application, and your financial snapshot will be evaluated. Expect to provide:
- A mortgage application
- Your Social Security Number
- Permission to pull credit reports
- Proof of employment and history
- Proof of current residence
- Proof of self employment
- Pay stubs
- Tax documents
- Bank account information
- Credit information
- Gift letters
- Monthly expenses, in some cases
Ask your lender for specifics.
Why Should I Get Pre-Approved?
If you have started visiting homes and want to be prepared to make an offer, you should get pre-approved. A pre-approval may have an application fee. Do your homework on the pre-qualification so you aren’t wasting your time and money.
A pre-approval will give you details on max loan amount, interest rates and terms. This will help you calculate exact monthly payments and refine your home search even more.
More importantly, you will have a lender willing to loan you money depending upon the conditions of the property you choose. Home sellers and Realtors will know you are ready to purchase if the price and home are right.
Pre-approvals carry much more weight than a pre-qualification. Realtors and home sellers prefer buyers who are pre-approved before they make an offer. A simple pre-approval can help you obtain your dream house over buyers without one or buyers who only have a pre-qualification.
Do keep in mind, a pre-approval does not guarantee financing. The property you choose will need to fit within all of the lenders criteria as well.
Final Thoughts on Pre-Qualification and Pre-Approval
I wouldn’t recommend doing much house shopping without, at minimum, a pre-qualification. Once you have narrowed down your choices on a lender and a home, it is time for that pre-approval.
These steps will put you in the best position to get into the home of your dreams.
Do you have any experience with pre-qualification or pre-approval? Tell me about it in the comments.