For buyers ready to start looking at homes, terms can get confusing, especially if this is a first-time home buyer. Pre-qualification and pre-approval are often used interchangeably, but they are very different and have different impacts on buying a home. Read below to learn more about these two terms and what they mean.
Pre-Qualification for a Mortgage
Pre-qualification is usually one of the first steps taken when buying a home. The buyer will work with a lender to get an estimate of how much they can borrow after a credit check and providing minimal information about their current finances. During this, the buyer can learn more about what mortgage options are available and what might be right for their needs when they do decide to purchase a home. This step is usually taken before looking at homes, as it allows the buyer to know how much they can afford to spend. The key to remember is that this is a rough estimate, and the final qualifications or approval terms may be different.
Pre-Approval for a Mortgage
A pre-approval is done closer to when a buyer may put in an offer for a home. This is not required to put in an offer, but it does help the buyer look serious about the purchase. With a pre-approval, the buyer will need to submit a lot more paperwork concerning their income and expenses, but the lender will provide a pre-approval letter for the amount the buyer can spend. This is usually only good for a limited amount of time, so it’s a good idea for buyers to get a pre-approval offer when they’ve found a home they’re serious about or if they believe they can find the perfect home quickly. This is a better estimate of how much the buyer can afford to spend, so the final amount of the mortgage shouldn’t be far off from the amount in the pre-approval.
What’s Needed for Each
The pre-qualification process is often done online nowadays and doesn’t require much from the buyer. They’ll likely need to fill out a form with their personal identifying information for the credit check and provide information about their income. The lender will go through this information and provide an estimate of how much the buyer can spend.
The pre-approval process is more in-depth and will require more paperwork. The buyer will work closely with the lender who will go through all of the buyer’s finances to determine exactly how much the buyer can borrow. This amount will be provided in a pre-approval letter, which the buyer can use to show sellers they can afford to purchase the home.
What’s the Difference?
The main difference is how much weight is given to the approved amount in the buying process. Pre-qualification just shows how much the buyer could afford but isn’t a completely accurate estimate. This means the seller may not be willing to accept the offer from the buyer, because it could turn out that the buyer isn’t actually approved for the full amount they were pre-qualified to use. Instead, with a pre-approval, there is a much smaller chance that the buyer will not be able to get a mortgage for the full amount. The seller is more likely to accept the offer since they know the buyer can afford to purchase the home. The pre-qualification is more of an estimate, while the pre-approval is very close to how much of a mortgage the buyer can get.
Which One is Better?
If a buyer is just starting their search for a new home, a pre-qualification may be better. They won’t have to spend a lot of time getting paperwork together and they’ll have a good idea of how much they can spend while they’re looking at homes on the market. On the other hand, if the buyer has found a home they want to purchase, it’s better to get a pre-approval, as this looks a lot better to the seller. This gives them a better chance of having their offer accepted and being able to purchase the home.
Although pre-qualification and pre-approval are often misunderstood and used interchangeably, they are very different ways to verify the amount of money a buyer may be able to get from a lender to purchase a home. If you’re planning on buying a home soon, it’s a good idea to look into a pre-approval as soon as you start looking at homes. While pre-qualification can help narrow down the amount you can purchase, pre-approval can give you the upper hand when you’re ready to buy!