Pre-Qualification vs. Pre-Approval: What Is the Difference?
August 18th, 2012
August 18th, 2012
When many home buyers – especially first-time home buyers – begin shopping for a new home, they mistakenly assume that pre-qualification and pre-approval for a home loan mean the same thing. While these two terms sound similar, they do NOT mean the same thing. And unfortunately, if you confuse the two terms, it could cost you your dream home.
When you first start thinking of purchasing a new home, a pre-qualification is a quick way to get a general idea on how much you may be able to borrow for a home loan. A pre-qualification may be done in-person, over the phone or online. Usually, there is no charge for pre-qualification.
During this process, you’ll provide your lender/broker with information on your income, assets and debts. They will quickly evaluate the financial information you provided and determine an estimated mortgage amount that they think you can afford. The lender/broker may discuss the various mortgage options available with you and make a recommendation based upon your individual situation. They will provide you with a letter of pre-qualification that states the loan amount you may be eligible to borrow.
However, a pre-qualification is only based on the information you have provided. The lender/broker will not pull your credit report, verify any of your financial information or determine if you’re really able to purchase a home. Therefore, since a pre-qualification is only based on unverified information, it really doesn’t hold that much weight in the eyes of lenders, realtors or sellers.
During the pre-approval process, you will meet with your lender/broker and complete a loan application. You’ll provide them with copies of your tax returns, bank statements, pay stubs, and other financial paperwork. Also, you’ll discuss the amount of money you have available for a down payment and closing costs. Following this meeting, the lender/broker will pull your credit report, verify your employment, and submit all of your financial documents to the loan underwriter for approval. Once the underwriter has analyzed everything, if you are determined to be creditworthy, you will receive a pre-approval letter that certifies you are eligible for a mortgage up to a certain amount. Also, this letter will specify your interest rate on the loan, how long the document is valid and other possible conditions for the loan. You will likely pay an application fee and a credit report fee for this process.
A pre-approval letter carries more weight than a pre-qualification letter. This letter shows realtors and sellers you have the financial means to purchase a home and have been qualified for a specific loan amount. So when you find your dream home and make an offer, sellers will know you’re serious about buying a home.
So, if you’re definitely ready to buy a home, it’s in your best interest to contact a knowledgeable mortgage professional who can answer all of your questions and help you get pre-approved.
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