As you prepare to apply for a mortgage loan, one of the first steps in the process is to get pre-qualified or pre-approved.
A pre-qualification and a pre-approval are types of mortgage approvals. Both will guide you through your home search as they each help determine the amount of mortgage you can afford.
It is essential to know that being pre-qualified and pre-approved for a mortgage loan is not the same thing. Both may sound similar, but only one will put you ahead of the competition.
What does it mean to be pre-qualified?
The process of being pre-qualified can be completed with a phone call or an online application. Pre-qualification is less formal because it serves as an estimate of how much you may be able to borrow based on your income. A pre-qualification considers your income, debt, credit history, and savings. The lender reviews your information and gives you an estimate of what you qualify for.
A pre-qualification is only a ballpark estimate because the lender does not always require proof of your financial history. It means that the lender does not pull your credit report, and does not review financial documents. The lender is solely relying on the information that you provide.
Being pre-qualified is less reliable and does not always lead to loan approval; it is vital to avoid making decisions based on your qualification status. In other words, do not put an offer in on a house if you have only been pre-qualified.
A pre-qualification is something that you want to do to gain a better understanding of your financial situation. When you are ready to start making offers on homes, you may want to seek a pre-approval instead.
What does it mean to be pre-approved?
Mortgage pre-approval is very similar to a pre-qualification, but it requires documentation and verification of your income, assets, and debts from other sources. A pre-approval will require a credit check, which results in a hard inquiry on your credit report.
Getting pre-approved requires that you go through specific steps to verify the information that you provided when you got pre-qualified-Meaning that you have to show proof.
Other than pulling your credit report, the lender will also collect financial documents such as your W-2s, pay stubs, tax returns, and bank statements. It provides the lender a more accurate picture of what type of loan you will qualify for and how much you will be able to afford.
After you are pre-approved, most lenders will give you a pre-approval letter that you can present to your realtor and also to sellers. The pre-approval letter adds more credibility to your offer by showing them that you can afford to buy a house.
Since the terms pre-approval and pre-qualification are often used interchangeably, it can be challenging to decide which one will work best for you. Therefore, it will depend on how the lender defines each one.
Each lender handles mortgage approvals differently. Be sure to ask your lender exactly how they define a pre-approval and a pre-qualification, and ask them which one requires a credit check. Ultimately, it will be your choice on whether or not you want an inquiry on your credit report. However, keep in mind that if you are currently in the market for a home, then an inquiry will most likely be necessary.
Once you check with the lender, check with your real estate agent to find out which version is more credible. That way, you will save some time when you are ready to make an offer.