Being pre-qualified for a mortgage is imperative before shopping for a new home. But being pre-approved is far better. So, what is the difference between the two?
It’s very easy to get pre-qualified. Usually, this can be done over the phone with your lender or online in a matter of minutes. By providing your lender with general information about your income, debts, and assets, you can quickly obtain a lender’s pre-qualification (or “pre-qual”) letter. There is no cost to get pre-qualified, and your lender will not do a thorough analysis of your financial picture (and likely won’t pull your credit report). So even though your lender has told you how much money they will probably loan you, there are still a lot of financial hoops to jump through before getting the loan.
Getting pre-qualified is helpful when you want to know how much home you can afford, and may be sufficient to start shopping for homes. It is also helpful when presenting an offer to a seller. Most sellers, and a lot of real estate agents for that matter, aren’t aware of the differences between being pre-qualified and pre-approved. So, when an offer comes in with a pre-qual letter attached to it, the seller will often believe the buyer is assured of getting a loan. But this letter bears no weight, other than being written on a bank’s letterhead. It will also have a disclaimer similar to this:
This is not a loan approval, and final approval is subject to verification of the borrower’s credit history, income, assets, debt ratio, clear title to the property, and a satisfactory appraisal of the property.
Being pre-approved means that the buyer has already applied for a loan and has submitted financial documentation (tax returns, bank statements, pay stubs, etc.) to the lender. A loan application fee may have been required. And the borrower/buyer has already been underwritten by the lender. Now, it’s just a matter of finding a property with clear title and obtaining a satisfactory appraisal. Since the buyer has already proven his creditworthiness to the bank, a pre-approval letter means a lot more than a pre-qual letter.
The only remaining items have to do with the property (title and appraisal).
Getting pre-approved prior making an offer on a house also means that the borrower can close faster. Since the borrower has already been underwritten, the appraisal and title examination can be ordered immediately. As soon as those items are reviewed by the lender, the sale is ready to close.
Pre-approved buyers should have an advantage over pre-qualified buyers when there are multiple offers on a home. If you’d like to find out how much home you can afford and want to get pre-qualified, or you’re ready to buy and want to get pre-approved (so you can move quickly when you find the right home), contact us for some great local lender references.