The mortgage process typically includes getting pre-qualified and/or pre-approved. They’re not the same, and in a competitive market, knowing which to get could be the difference between landing your dream home and losing it to another buyer.
What Does it Mean to be Pre-Qualified?
Being pre-qualified means a lender has decided you will likely be approved for a loan up to a certain amount, based on your current financial situation. To get pre-qualified, you simply tell a lender your level of income, assets, and debt. The lender will then take that unverified information and determine how much you will likely be approved for. There are no guarantees you will actually be approved for the same amount.
• No effect on credit score
• No fees
• Helps you estimate what you can afford
• Good for first-time home buyers
While pre-qualification is often the first step of the mortgage process, some sellers won’t take you seriously until you’ve been pre-approved.
What Does it Mean to be Pre-Approved?
Being pre-approved means you’ve actually been approved by a lender for a specific loan amount. When pre-approved you will receive a letter that states your approved loan amount. Unlike getting pre-qualified, when getting pre-approved you provide documented financial information (pay stubs, statements, obligations, credit report, etc.) to be reviewed and verified by the lender.
• No fees
• Gives you negotiation power
• Helps you know exactly what you can afford
• Allows you to close faster
Something to keep in mind is that being pre-approved doesn’t guarantee you a loan. You still have to complete the application, go through the underwriting process, and wait for final approval. But being pre-approved indicates your intent to purchase, so sellers look fondly upon buyers with pre-approval letters.
Which One Should I Get?
If you’re new to home buying, not sure whether you can support a mortgage, or if you’re just not ready to buy yet, pre-qualification makes more sense. Getting pre-qualified doesn’t affect your credit score, so it’s a good way to begin if you’re just browsing.
Now if you’re ready to buy within 90 days, pre-approval is what you want. When the housing market is hot, homes sell fast — sometimes within hours of being listed. If you already have financing, you too can move fast, and that gives you an immediate advantage over other buyers. There is a small credit hit (typically around five points), but if you’re serious about buying a house, you need to get pre-approved right away.