Buying a home with cash is no doubt the best option. But, many people do not have so much hard cash lying around that is why mortgage loans are a crucial part of the home buying process.
As you prepare to purchase a home with a mortgage loan, you will have been told that you need to prequalify or get a pre-approval. This should be done early in the home-hunting process because in a competitive market being pre-approved or pre-qualified makes you more appealing to sellers. This shows them that you are serious about purchasing a house and not just looking around. It will also help you save time by looking at homes that you know will not fit in your budget and so would not have to deal with the heartbreak of falling in love with a home that you cannot afford.
So, what does it mean to be pre-approved or pre-qualified? These two terms are almost identical are often used interchangeably. However, they are differences in the ways lenders use them. But, both give homebuyers a good indication of how much they borrow when looking for a home. Let us take a look at what a pre-qualification or pre-approval is and how they differ.
Pre – Qualification
Pre-qualification is the first step you should take when you start your home search as it means the lender has assessed your creditworthiness and given you an estimate as to how much mortgage you can qualify for.
- Pre-qualification can be done online or verbally over the phone and you can get a prequalification letter in less than a day.
- You will have to give your lender information about your income, your debts like car payments, student loans as well as your line of credit like credit cards.
- You will be asked about your preliminary credit score.
- Your debt-to-income ratio will be estimated by comparing your debts and income. This is an important factor as lenders can determine your monthly mortgage payments.
- Your credit score will not be affected as there will be no hard inquiry.
As your income and assets are not been verified you need to keep these few things in mind when you apply for a pre-qualification.
- The loan amount is merely an assessment of the mortgage amount you can qualify for, as it has not been verified. So, you should give the lender accurate information as possible regarding your assets, income, and credit.
- When negotiating with property owners, it has limited value as compared to a pre-approval.
- However, a pre-qualification is the first thing that will show that you have seriously looked into the financing as you have already had it lined up.
Pre – Approval
Pre-approval is the next step which is very similar to a pre-qualification but it will usually be more involved and take a few days to obtain. However, it will enable you to provide proof that you have conditional loan approval and are ready to commit. It can help you and your Realtor to negotiate for the home you intend to purchase.
- You will need to provide or permit your lender to obtain online copies of things like your W-2’s, tax returns, pay stubs, and bank statements.
- You permit your lender to pull out your credit report.
- The mortgage amount you are approved of will be given, so you can shop for homes at or below that price.
- A pre-approval letter is generally preferred by sellers as it tells them that you have the cash to back up your offer.
- It will give you an edge over other offers as it makes you as close to a cash buyer as you can be. It is also a huge advantage over other buyers in a competitive market.
- For many lenders, a pre-approval letter will be the prerequisite for signing a formal contract.
- As most of your information is in the lender’s system it will accelerate the loan process and put you on the fast track to closing.
- Getting a pre-approval even by multiple lenders at once will not significantly hurt your credit scores, but it may knock off a few points.
- There are sometimes charges that are associated with a pre-approval, so you need to find out the details from your mortgage lender.
It is however important to remember that though pre-qualification and pre-approval have their benefits, neither of them guarantees that you will receive the loan. Secondly, you are not obliged to get a mortgage loan from the same lender who gave you the pre-qualification or pre-approval letter. Though many home-buyers opt to apply for a mortgage from the lender who pre-qualified or pre-approved them, you should shop around for the best offer before finally applying for a mortgage.