By Ashley Gower
May 9, 2024Confused about pre-qualification and pre-approval? You’re not alone! Many first-time homebuyers get tripped up on these mortgage terms; not only do they sound similar they have a few similar qualities. Here we break down the difference between pre-qualification and pre-approval, explaining what each involves. Also learn about the benefits of getting pre-approved, and how it can give you a leg up in today’s competitive housing market.
Pre-qualification: Testing the Waters
Imagine pre-qualification is like window shopping. You get a general idea of what you like and where you might want to shop, but you’re not quite ready to commit.
Pre-qualification is a quick and easy process, often done online with a calculator. First answer some basic questions about your income, job situation, and any debts you have. Then, based on this info (which you provide), a lender will give you a rough estimate of how much you might be able to borrow.
The Perks of Pre-qualification:
- Fast and Easy: No need to gather paperwork or get your credit checked (yet).
- Budget Compass: Get a general idea of what you can afford, helping point you in the right direction.
The Downsides of Pre-qualification:
- Not Set in Stone: The estimate is based on what you tell them, and the lender hasn’t verified your finances yet, so sellers likely won’t take your pre-qualification seriously.
- Can’t look at homes with an agent, yet: Similar to a seller, real estate agents know you may not actually be able to afford the homes you think you’d like to look at and will encourage your to get pre-approved first.
Remember: Pre-qualification is a great first step, but it’s not the real deal – a pre-approval is where things get serious.
Pre-approval: Getting Down to Business
Pre-approval, on the other hand, is like actually having your credit card out and ready to swipe at the store. You know exactly how much you can spend, and sellers know you’re a serious buyer. This gives you the upper hand to other window shoppers when you’re find the right place and want to make an offer right away.
What happens during a pre-approval?
Income, Assets, Debts
You will fill out a mortgage application and answer some questions about your finances, rental or ownership history, and credit history. Then you will provide documents to verify your:
- Income (think paystubs, W2s, etc.)
- Assets (bank statements)
- Any debts you owe (like car payments, student loan payments, credit cards, etc).
Save our Pre-Approval Document Checklistto help you organize your documents before getting pre-approved.
Credit
Next, we will pull your credit report to see your credit score, checking to see if there were any red flags in the past that weren’t disclosed. Things like bankruptcy, delinquency on a loan, etc.
Savings
We’ll also discuss how much you have set aside for a down payment and closing costs.
Based on this verified information, you’ll receive a pre-approval letter stating the exact amount you’re pre-approved for, and the estimated interest rate.
How Long is a Pre-Approval Valid for?
The pre-approval letter will only be good for 60-90 days. Finances change, interest rates change, and we want to make sure clients still qualify for what they were originally pre-approved for, or maybe they qualify for even more after additional review!
You’ll just need to provide updated (or additional) documents you’re asked for. We will take current interest rates into consideration and how the fluctuations in interest rates could affect your affordability.
Benefits of Being Pre-Approved:
- Solid Numbers: You know exactly how much house you can afford, no more guessing games.
- Realistic Expectations: Sets clear boundaries for your home search, so you don’t fall in love with a place you can’t afford.
- Stronger Offer: A pre-approval letter shows sellers you’re a serious, truly qualified buyer, giving you a leg up on the competition.
Pre-Approval with a Trusted Lender
Getting pre-approved with a trusted lender provides you with added peace of mind and gives you access to a professional who can run multiple scenarios for you and all the “what ifs”:
- What will happen to my payment if I get an FHA loan vs another loan?
- Do I qualify for a conventional loan?
- What would be the payment difference if I had a 3.5% down payment vs a 5% down payment? – learn about low down payment options.
- What happens to my payment if I buy down my interest rate?
- Should I look at multifamily housing and try house hacking?
We’re here to help, so use our expertise to your advantage now and for your future.
Be Honest and Upfront in Your Pre-Approval
During your application, but honest and upfront about your financial situation. This will help us give you an accurate picture of what you can afford and avoid any surprises down the road. We can often work through many of the challenges our clients are nervous to share with us.
Remember, we are here to serve you! Its our goal to help homebuyers achieve sustainable homeownership and build generational wealth now and in the future.
Pre-Qualification vs. Pre-Approval: Side by Side
Beyond Pre-approval: Setting Sail on Your Homebuying Journey
With your pre-approval letter in hand, you’re officially ready to set sail on your homebuying adventure! Here are some additional things to keep in mind:
- Work with a Real Estate Agent: A good agent can help you find homes within the budget we’ve set together, negotiate and guide you through the offer process, and answer any questions about homebuying along the way.
- Factor in Additional Costs: Remember, the mortgage isn’t the only expense. We will also consider closing costs, homeowners insurance, and potential property taxes when discussing your budget.
- Enjoy the Ride! Buying a home can be stressful, but it’s also an exciting time. Celebrate the milestones and don’t be afraid to ask for help when you need it.
Check out our home loan process map to see what’s to come in your homebuying journey. (Permalink to map of the mortgage process)
By understanding the difference between pre-qualification and pre-approval, you’ll be a more informed and confident homebuyer. With the right preparation and resources, you’ll be well on your way to finding your dream home!
These blogs are for informational purposes only. Make sure you understand the features associated with the loan program you choose, and that it meets your unique financial needs. Subject to Debt-to-Income and Underwriting requirements. This is not a credit decision or a commitment to lend. Eligibility is subject to completion of an application and verification of home ownership, occupancy, title, income, employment, credit, home value, collateral, and underwriting requirements. Not all programs are available in all areas. Offers may vary and are subject to change at any time without notice. Should you have any questions about the information provided, please contact us.