So you've been dreaming about a new home for a while. You've searched online, circled homes in the Sunday paper, drove neighborhoods looking for Open House signs. Now you're ready to move past that browsing stage and actually talk to a lender. You've heard about pre-qualification and pre-approval, but what's the difference? And how do you know which one you need? Sometimes these terms are used (incorrectly) interchangeably. Well here's a breakdown of each option, and some simple advice on which one you might need.
Pre-qualification vs. Pre-approval. What's the difference?
A pre-qualification is just as it sounds. It is pre-qualifying you for an amount that you might be able to borrow. This pre-qualification is based on information you provide to a lender, either verbally over the phone, through email, or some other communication. It is a rough estimate of how much you can afford based on the information you provide. The lender does not review any documentation or do any in-depth credit or background check.
A pre-approval carries much more weight in the sense that it shows your REALTOR® and the Seller that your lender has done a review of your credit report, verified income, assets and other related financial documents. A pre-approval tells Sellers that you have the financial stability to purchase a home.
In other words, a pre-qualification is just a simple calculation of numbers that you give to the lender so that they can determine what you can afford. It usually doesn't involve verification of income or having a credit check done.
A pre-approval is a more in-depth review and verification of your statements and credit reports. The lender will run a credit check, verify income and bank statements and will usually take longer to get. This amount that the lender gives you will most likely be the amount that the financial institution will lend you.
So What’s the Point?
By now, you’re probably asking yourself, “What’s the point”? Well, it certainly won’t hurt to get pre-qualified. You will eventually have to provide all the necessary documents if you want to get a mortgage, so my recommendation to homebuyers is to go straight to the pre-approval process. If you’re serious about buying a home, then do the extra work to get that pre-approval so you’re ready to make an offer when the right home finds you.
However, if you are just testing the waters, getting a feel of what is out there, and not ready to get your credit checked, getting a pre-qualification can at least point you in the right direction.
Why is a Pre-Approval Better Than A Pre-Qualification?
Simply put, pre-approvals carry more weight than pre-qualification. The pre-approval says that the lender has checked your credit and verified income and bank statements to approve a specific loan amount.
A pre-qualification can be used as an estimate of how much you might be able to afford, but it is less accurate than a pre-approval.
You’ll Know How Much House You Can Afford.
Getting pre-approved before you being the house hunting process allows you to know how much house you really can afford. By having this knowledge, you can focus on homes that are truly in your budget. By knowing your affordability ceiling you won’t fall in love with a home that is not in your budget.
It Gives Your Offer Some Clout.
In today’s market, a home may attract more than one offer. If the Seller is looking at multiple offers, they may choose the one that appears more solid. An offer with a pre-approval attached is almost mandatory and in fact, most agents will not submit an offer without a pre-approval. The pre-approval gives the Seller the peace of mind that the Buyer is financially capable to follow through with the purchase.
It Increases Your Negotiating Power.
In addition to presenting a strong offer, a pre-approval may give your agent an upper hand when negotiating the deal. If the homeowner is a motivated seller, he/she may be more willing to accept a lower offer from someone that is more financially solid.
It Saves Time.
The mortgage process can be a lengthy one. Getting pre-approved early cuts down on the time be submitting the offer and closing. With a pre-approval, you are ready to make an offer.
The Bottom Line
If you are a serious home buyer, make sure you’re pre-approved. Your offer will be taken more seriously and that will give you a better chance of getting your offer accepted.