When buying your first home, it’s easy to get overwhelmed by the multiple steps and tasks in the mortgage process. At the mortgage application stage of the home buying process, you’ll come across new terms, including pre-qualification and pre-approval. While these terms are used interchangeably, there are crucial differences that you need to know. Pre-qualification and pre-approval may hold the key to a successful closing on that dream home.
In this article, you’ll learn the difference between pre-qualification and pre-approval and why the two steps matter in the mortgage loan application process context.
What Is Pre-Qualification?
Pre-qualification is a preliminary and informal assessment of your financial situation by a mortgage lender. This is the initial step in the mortgage application process, in which a lender reviews some basic financial information, including your income, debts, and assets.
This assessment determines how much money you can borrow. The lender can carry out a soft credit check, which won’t affect your credit score, to give you an idea of your borrowing power and the interest rate that may apply.
Pre-qualification gives you a reality check and helps answer a critical question; are you ready to buy a home? The lender can issue a pre-qualification letter outlining the amount they could lend based on your self-reported financial information.
Benefits of Pre-Qualification
- A quick and easy process. You can complete a pre-qualification application online or over the phone in just a few minutes.
- It’s also a great way to understand how much house you can afford. By getting a pre-qualification estimate, you can narrow your home search to homes within your budget.
- Helps in your budgeting for a home and gives you a clearer picture of the financial implications of buying your first home.
- Helps learn about available mortgage types, including government-backed loans and mortgages for first-time homebuyers
- The pre-qualification letter can help you demonstrate your financial strength to sellers.
- Makes you more competitive by leveraging the pre-qualification letter to show a seller that you’re likely to qualify for a mortgage. Home sellers want to deal with buyers likely to access financing more quickly.
Limitations Of Pre-Qualification
- Pre-qualification is not a guarantee that you’ll be approved for a mortgage. It’s simply a preliminary assessment based on the information you provide.
- The estimate you receive may not be accurate if there are errors or omissions in the information provided. The process does not involve a credit check or your income and assets verification.
- Pre-qualification can give a false sense of security because there needs to be an in-depth analysis of your finances.
What Is Pre-Approval?
Pre-approval is a formal and more in-depth analysis of your financial situation by a lender. During pre-approval, you submit a complete mortgage application and provide detailed financial information to the lender, such as tax returns, bank statements, and employment verification.
The more detailed financial details allow the lender to provide a more accurate estimate of how much money you can borrow and at what interest rate. A pre-approval involves a hard credit check to determine your creditworthiness and loan repayment ability.
If you plan to buy your first home, consider getting a free copy of your credit report and identify any errors early enough. A good credit score is critical in getting financing at the best rate. Correcting any errors in your credit report can improve your credit score and get a mortgage at a more favorable rate. In addition, this mortgage application process gives you a commitment from a lender to lend you a certain amount of money.
The pre-approval letter provided by the lender proves your seriousness and readiness to buy the home. This letter also helps you know how much home you can afford.
Benefits of Mortgage Pre-approval
Some main reasons a mortgage pre-approval is beneficial for your first home purchase include:
- Gives you a more accurate picture of how much you can afford to spend on a home. This can help you avoid falling in love with a home outside your budget.
- Reduce timelines and improves the lender’s ability to close your mortgage fast.
- Makes you more attractive to property sellers because you are creditworthy
- Move you one step closer to home ownership.
- Helps get all your documents in order
Limitations of pre-approval
Like pre-qualification, pre-approval has its limitations which include:
- The pre-approval letter is only valid for a set period (typically between 60 and 90 days)
- A pre-approval doesn’t guarantee you a home loan
- The pre-approval involved a hard credit score check which affects your credit score
If you are still looking for a home within the set time frame, you must go through the pre-approval process again. Unfortunately, this again affects your credit score because of the checks involved.
Pre-Qualification vs. Pre-Approval: Key Differences
|Mortgage Qualification||Mortgage Pre-approval|
|Informal, quick, and easy assessment of your financial situation based only on the information you provide|
More formal and in-depth analysis of your financial situation that includes your credit history, income, and existing debt
|Involves a soft credit check on your credit score||Involves a hard credit check and verification of your income and assets. Financial information and documents have to be verified.|
|Doesn’t affect your credit score||Dings your credit score|
|Not an official document||An official document from a lender|
|An estimate of what you could borrow||An offer of what the lender can lend|
To Get Pre-Qualified or Pre-Approved for a Mortgage?
So, which option is right for you?The decision to get pre-qualified or pre-approved for a mortgage depends on your specific needs and situation. If you’re just starting your home search and want to get a sense of how much you can afford, pre-qualification may be the way to go. It’s a quick and easy process that can give you a rough estimate of your borrowing power.
However, if you’re serious about buying a home and want to make a strong offer, pre-approval may be a better option. It’s a more accurate estimate of how much you can afford and can make you a more attractive buyer to sellers.
Both pre-qualification and pre-approval are important in the home-buying process. If this is your first home, you might have yet to learn about how much money lenders are ready to offer. A pre-qualification gives you an idea and helps you understand how much house you can afford and maybe even the type. Once you’re ready to start the serious home search, a pre-approval is handy as leverage to close on your first home faster. Still trying to decide which option is right for you? Talk to your real estate agent, lender, or mortgage professional who can help guide you. With the right information and guidance, you can make an informed decision and find the home of your dreams.
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