Mortgage Pre-Qualification vs Pre-Approval: What’s the Difference?
You may have heard of the terms “pre-qualification” or “pre-approval” and you might be wondering what the difference is. Both of these processes can help you be approved for a home mortgage, but the terms of pre-qualification and pre-approval are vastly different. If you’re thinking about purchasing a house in the near future, it’s important to become knowledgeable about these terms and how these separate processes can help you in your home search.
Pre-qualification and pre-approval are two processes that can help ensure your success when looking for a home. Today we’re going to take a look at what each of these processes involves and which one(s) may best suit your needs.
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What Is Mortgage Pre-Qualification?
Pre-qualification is a process in which you have a conversation with your lender to determine your homeownership needs. In addition, your lender will take a look at all of your assets versus debts and determine what size of loan they believe would be best for you. Your lender representative will examine your income and will do some quick preliminary math to help you understand about how big of a monthly mortgage you’ll be able to handle.
During pre-qualification, your bank or lender will not run your credit score. This process does not set up a new loan for you. This is simply to help you and the lender become comfortable with some possible terms that could arise from a new loan. You can explain exactly what you’re looking for in a home and the lender will tell you if that is within the realm of possibility according to your current income and debts.
What Is Mortgage Pre-Approval?
Pre-approval on the other hand, is the actual process of being approved for a home loan. Your lender will run your credit score and will enter all of your financial information into their system. They will come up with a more exact loan number, duration, and monthly payment that you are both comfortable with. Essentially, your bank is telling you that if you choose to make an offer soon after pre-approval, your loan will be accepted through their financial institution.
This process is usually completed just before you’re ready to put an offer down on a home. Most likely, if you’re applying for pre-approval, you’ve been looking at houses already, you know what you want out of a home, and you know how much you’d like to spend. Pre-approval will give you the confidence to put an offer on a home and know that the bank will approve the offer as long as it stays within the parameters that you discussed.
Mortgage pre-approval is the last step that you need to take before an actual loan is created. After you put an offer on a home and it is accepted by the seller, the lender will draw up your mortgage contract and you’ll set a date to close on the home.
Which Do You Really Need?
If your bank is able to provide you with both services, it’s not a bad idea to think about pre-qualification and pre-approval. Pre-qualification is a great first step for someone who is new to the homebuying world. On your first home, you may have no idea what to expect or what you could potentially be approved for. Although pre-qualification won’t be as pinpoint accurate as pre-approval, it’s still going to be in the ballpark that you’re looking for. You’ll know what range of homes to take a look at and what your finances could look like after you’re approved for a mortgage. Pre-qualification is a smart idea for those looking to take their time purchasing a home and it will help put things into a realistic perspective before you start shopping.
Expedite Your Home Search With Pre-Approval
If you’ve purchased a home previously, you may already know the drill. You might want to go right into the pre-approval process so that you can quickly put an offer down on a home. You might be pretty confident about how much you have to spend and what type of home you need. For those who are looking to buy something fast, pre-approval is never a bad way to go. You’ll still be made aware of exactly where your finances stand and what you can be approved for.
Protect Your Credit With Pre-Qualification
However, in the pre-approval process, your credit is checked. So, you should plan on being pre-approved only once or twice in a short period of time. If the bank isn’t comfortable approving you for a loan, you could be denied until you’re able to get your income, credit score, and/or debt within a desired range. With that being said, if you’re not sure what the bank will say about your current financial status, it might be a good idea to ask for pre-qualification first.
What’s more, if it’s been several years since you’ve purchased a home, the market may have drastically changed since you last purchased a house. Even if you were approved for a certain loan years ago, that doesn’t mean that you can be approved for the same loan today. Your financial status might have changed and the price of homes may have changed as well. In this case, I suggest that you start with pre-qualification first. This way, you can find out if you’ll be approved for the mortgage you want, without having to run your credit or start the more involved process of pre-approval first.
Maximize Your Options: Get Both
The long and short of it is, you should do both if you have the time. It’s always a good idea to talk with your lender about your expectations versus what they think would be best for you and your mortgage. However, pre-approval is essential when you’re thinking of putting an offer on a home quickly. You absolutely need to at least be pre-approved before you decide on any one particular home. Without pre-approval you’re taking a shot in the dark at whether or not the bank will even accept the terms of the loan you’re looking for. In order to confidently shop for a home, I suggest taking the time to be pre-qualified and pre-approved. You won’t regret it when you land the house that you truly want.
Want to improve your credit score before lenders check it? Visit our credit score resource and learning center to learn more. Errors on your credit report hurting your chances of getting your home loan approved? Visit our letter template resource center for more information on disputing entries.
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Trisha is a writer and blogger from Boise, ID. She is a dedicated vegan, an avid gamer, cat lover, and amateur SFX artist.