The Differences Between Mortgage Pre-Qualification and Pre-Approval

 

What You Need to Know about Financing 

The first step to buying a home is knowing how much you have to spend on a home. 

For most people, that means meeting with a mortgage lender and providing them with information to find out how much of a loan you qualify for. A mortgage lender will let you know if you are able to buy, how much money you can borrow, and what loan you will qualify for. If you don't qualify, they will explain what you can do to clean up your credit so you can buy a home soon.

I'm sure you've heard  the terms pre-approval or pre-qualified and wondered what is the difference? Aren't they the same? They are not the same and I am here to explain the difference.

Knowing the difference between the two can save you heartache down the road. 

Pro Tip: Ask your mortgage lender if they are providing you with a pre-qualification or a pre-approval. 

The Difference Between a Pre-Qualification and a Pre-Approval

Some lenders will give a pre-qualification and some lenders will give a pre-approval. 

They are simple and don't take a long time to complete, but can make all the difference when it comes down to closing on your new home.

A Pre-Qualification is a general idea of what you could qualify for without doing a credit check. It is an estimate of the loan amount you may qualify for.

This amount is based upon the borrower's pay-stubs, and bank statements. It's a quick process and doesn't guarantee financing.

A Pre-Approval is a complete look at the borrower's credit history. The lender will perform a credit check, look for outstanding debts, collections or liens, 

The borrower then is given a conditional commitment in writing with the loan amount, interest rate, and the loan type they qualify for. 

Knowing the Difference Can Save You Heartache

Let's say you found a home you really really like and want to place an offer. Your offer is accepted and you are so excited!! 

Then, inspections are ordered and paid for. Your loan is sent to the underwriters to begin their approval process. And, right before you are about to start the appraisal process you  get a call from your lender. Your lender informs you that your loan has been denied from the underwriter.  Why? They found something on your credit report that will disqualify you for a loan. 

Now, you are heart broken! You have to terminate your contract, and hopefully your earnest money will be refunded. Had the lender performed a Pre-Approval this wouldn't have happened.

This is a true story and this happens all the time. It just happened to someone I know and they were devastated.  It's upsetting for everyone involved; the buyers, the sellers, and the agents. 

I reiterate - Ask for a Pre-Approval. It's just a little bit more work for the lender and you, but it is well worth it to know that the story above won't happen to you. 

Things to Remember: 

1. Ask your mortgage lender for a pre-approval not a pre-qualification letter. 

2. A pre-qualification is not a sure thing and doesn't carry weight like a pre-approval does.

3. Having a pre-approval shows any seller that you are a motivated serious buyer.

4.  Knowing what you qualify for prevents wasted time looking at properties that are too expensive.