These two terms are often confused or incorrectly used, but in reality they couldn’t be more different. You may even find some real estate agents and loan officers use the terms wrong, so don’t worry, you’re not alone. So what is a Pre-Qualification and a Pre-Approval anyway? Here’s what you need to know.
A pre-qualification letter from a lender is just an estimate of how much house they think you can afford, or how much they might be willing to lend you. This is the simplest and easiest of the two to get and shouldn’t cost you anything from a reputable lender. These can be obtained by either calling or sitting down with a lender and giving them some basic information about yourself such as your income, debts, assets and any down payment you might be able to provide. At that point the lender will have a general idea of what you may qualify for in terms of a mortgage.This doesn’t mean that they are willing to lend that amount, and it doesn’t mean you have to go through them for a mortgage either. Lenders will typically give you this information in writing in the form of a fairly standard letter. Neither side has committed to anything at this point, but it should give you a better idea of what your options are going to be. The best time to get a pre-qualification letter is before you even start shopping for a home. That way you don’t fall in love with a $400,000 house and find out you only qualify for $325,000. A good real estate agent will want to have a copy of the letter as well so they know how to best help you in your search. Don’t worry if you don’t have one yet though your agent can suggest lenders or help you find someone to talk to.
On the other hand a pre-approval is a little bit more involved but carries a lot more weight when making an offer on a home. To make the transition from a prequel to a pre-approval you will need to provide a lender with documentation of your income debts assets etc. You will have to do all of this anyway once you find the right house this gets that part of the process out of the way in the beginning and speeds up the transaction once you do find your dream home. There is typically a fee involved at this point though and how those are handled and how much they are can vary from one lender to another, so make sure to ask them about this.After you file the application and pay the fee the lender gets to work and starts the process, running a credit check and verifying all of your documentation. Once all of that is done your lender will give you a letter of commitment saying how much they will be able to lend you. This letter carries much more weight than the first kind, as you are showing that you have the ability and to get a loan and that a lender has actually checked you out. In today’s fast paced multiple offer situation market this can be the difference between getting your dream home and losing out to another buyer. Sellers and real estate agents know you are serious and are much less risky than someone with only a pre-qualification.
Keep in mind though even a pre-approval is not a 100% guarantee that you will be approved for the mortgage. There are other factors that have to be taken into consideration like the appraisal, checking the title inspections and depending on the loan type other factors.It is also not binding for you to get the mortgage with that lender. You still have the option to go with a different lender, but sticking with the same lender significantly shortens the process and reduces the number of time you have to pay application fees again.
I hope this helps and if you have any questions about the home buying process or how to get in touch with a quality lender shoot me an email or fill out the contact form at the top of the page and I would be happy to help!