Pre-Qualified Vs. Pre-Approved
When it comes to the journey of buying a humble abode, there are processes to go through to ensure that you have what it takes to buy that home. The first two of those processes are ensuring you’re pre-qualified to possibly buy a home as well as being officially pre-approved to put an offer down on a home.
But being pre-qualified and being pre-approved sound pretty similar, but it’s very important to know the differences so that you don’t run into any awkward situations, like those really awkward moments when you try to buy a home and can’t.
What does being pre-qualified mean?
Getting pre-qualified is the first step to take in the mortgage process, and typically it’s very simple. Just think of it as a conversation with your bank or lender. In that conversation, you would talk about your financial picture: this would include your debt, income, an estimate of your credit, monthly bills, and assets. After giving this information, the lender can give you an overarching view of whether or not you can pay a mortgage, and if so, the size of the mortgage for which you qualify. Pre-qualification can be done over the phone or on the internet, and there is usually no cost involved.
The pre-qualification step allows you to discuss any goals or needs you may have regarding your mortgage with your lender. At this point, a lender can explain your various mortgage options and recommend the type that might be best suited to your situation, so if you don’t necessarily qualify for a mortgage, the lender can help you figure out what needs to be done in order to become pre-qualified.
How in-depth does this process go?
When we say “overarching view”, we mean that pre-qualification gives you just an idea. What it does NOT do is give you an in-depth analysis of your credit report or heavily looks into the specifics of your ability to purchase a home.
Because it’s a quick procedure, and based only on the information you provide to the lender, your pre-qualified sum is not a sure thing; it’s just the amount for which you might expect to be approved. For this reason, being a pre-qualified buyer doesn’t carry the same weight as being a pre-approved buyer who has been more thoroughly investigated (Want to go through this process now? Check out this pre-qualification calculator.).
What does it mean to be pre-approved?
- Getting pre-approved is the next step, and it is a much more involved process than being pre-qualified. There is a mortgage application that needs to be completed , but at this stage, you probably will not have found a house yet, so any reference to “property” on the application will be left blank.
- Then there are necessary documentation you should bring to the lender in order for them to perform an extensive check on your financial background and current credit rating. From this, the lender can show you the specific mortgage amount for which you are approved. You’ll also have a better idea of the interest rate you will be charged on the loan and, in some cases, you might be able to lock in a specific rate.
What are the necessary documentation?
This can vary depending on the lender and your circumstance, but typically, anything that gives more information on your finances (pay stubs, credit information, tax documents, etc.).
What happens once pre-approved?
- With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. This puts you at an advantage when dealing with a potential seller, as he or she will know you’re one step closer to obtaining an actual mortgage.
- HOWEVER, this process on a per-property basis, so if you want to put an offer down on multiple homes, you will have to go through this process for each property.
- Keep in mind, this written document does expire.
By completing both of these steps – pre-qualification and then pre-approval – before you start to look for a home, you will know in advance how much you can afford. This way, you don’t waste time with guessing or looking at properties that are beyond your means.
But, make sure you always know the difference because even though they look related, they are not twins, and you do not want to get mixed up in the world of buying your dream home.
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