Homebuyers

Pre-Approved Mortgage or Pre-Qualified

This is it. You're ready to make the move into homeownership. From all the online searching you've done, you know you need to get "pre-something-ed" to prove you are a serious buyer. However, which is it: pre-qualified or pre-approved? Both sound good, but they serve different purposes.

What's the difference between pre-qualified and pre-approved?

A pre-qualification is an estimate from a mortgage company about roughly how much home you'd be able to afford based on your description of your financial situation. A pre-qualification could be a good starting point when you are beginning your home search. It will help you narrow down your search to homes in a certain price range.

Pre-approval, on the other hand, is a much deeper dive into your credit, income, assets, and debt to determine whether you're ready for a mortgage and how much home you can afford. Consider the pre-approval process a test drive before you submit your actual mortgage application.

How do you get pre-qualified?

The first step is to get in contact with a mortgage company, either over the phone or online. With many mortgage companies, you can now start the pre-qualify process online. If you prefer speaking to an actual person, you can certainly do that as well.

At the beginning of the pre-qualification process, you'll be asked to share information on your credit, your income; assets (savings, investments, retirement accounts, etc.); and the amount of debt you owe.

It's an interaction that helps establish some financial parameters before you start looking at homes by helping you answer a few key questions:

• What price range should I be looking in when I start my search?
• Am I ready to do this? Or do I need to save more and/or pay down more debt?

While the process is useful, especially for first-time homebuyers, it isn't rigorous enough to distinguish you from other buyers in a multiple-bidding situation.

The reason is that the letter is based on a "best guess" by the Loan Officer. While a pre-qualification could be a good first step for many homebuyers, it doesn't give you a full view of what you can truly afford because the information is not reviewed by an Underwriter or verified in the process.

Pre-qualification also doesn't address the question that matters most to sellers, Real Estate Agents, and you: Can they/we expect to be approved for the type of mortgage needed to buy this home? To answer that you need to be pre-approved.

How do you get pre-approved?

Getting pre-approved before you start searching for your dream home is critical because the pre-approval will determine if you qualify for financing, and for how much based on credit, income, liabilities, and debt verification.

The Loan Officer and an Underwriter will verify the facts and figures you discuss, along with your credit history. This process can also help pinpoint things you might want to improve—or errors that you'll want to correct—before entering the formal application review process. Loan Officers will also begin looking for mortgage programs that might apply to your financial situation. The pre-approval process is more rigorous than a pre-qualification and because it is fully underwritten, helps ensure your homebuying process will go more smoothly.

In addition to ordering your credit report, Loan Officers may ask for copies of:

• Last year's W-2s
• Current pay stubs
• Brokerage and other savings account statements
• Your monthly expenses
• A current mortgage statement and homeowner's policy (if applicable)

Once you are pre-approved, you'll receive a letter to share with Real Estate Agents and sellers.

Why is it important to get pre-approved?

There are several reasons why you get pre-approved other than giving you insight into how much home you can afford.

First, sellers prefer to work with pre-approved buyers because they already know their credit and income qualify them to obtain home financing. This will give your offer on a home an advantage over other buyers.

Additionally, in the eyes of a real estate agent, a pre-approval signals that a borrower is well-qualified and serious about buying a home. The more likely it is that they'll close a deal, and therefore earn a commission, the harder they will work on your behalf.

What happens after you get pre-approved?

It's important to note that after you have an offer accepted on a property, you will still need to officially apply for a mortgage. That review process will involve a deeper dive into the information you've already provided, as well as into the specifics of the property itself. Fortunately, having a pre-approval also means faster service to get you into your home sooner, so the official mortgage application is likely to be easier than with just a pre-qualification.

Additionally, a pre-approval is not a guarantee that you will be approved for a mortgage for the home you have chosen; it is conditional on the appraisal of the property.

Also, if your financial situation changes (you lose your job, make a major purchase, increase your credit card bills, etc.), the loan officer will have to reassess your situation and may need to recalculate your maximum loan amount.

Why bother getting pre-qualified?

The pre-qualification process takes very little time or effort on your part. You may not even need to collect copies of financial documents like W-2s. If you already have an idea of the area where you want to look and what type of home you can afford, skipping the pre-qualification step can make sense.

By comparison, for most buyers, a pre-approval is a step they shouldn't skip. Having a letter from a lender that states you are pre-approved can be especially helpful in neighborhoods where the existing home inventory is tight, those where there might be a lot of competition, or when the home you are looking at is perfect. Being pre-approved makes it easier for the seller to accept your offer instead of one from a buyer who hasn't taken this extra step.