The real estate finance industry is worth $3.5 trillion. Financing is a desirable option when buying a home. Prospective homeowners can get a mortgage based on their affordability, their credit, and other unique factors such as the home they buy. Homebuyers also don’t have to wait until the buying process to know they qualify for a mortgage. This is where mortgage pre-approval and pre-qualification come in. While both terms sound the same — and have many similarities — but they also have differences that affect your mortgage qualification. Are you pre-qualified for a mortgage?
Or pre-approved? Continue reading to understand the differences.
What Does Pre-Approval Mean?
A mortgage pre-approval means the lender viewed your financial documents and based on your financial situation approved you for a mortgage.
What’s the purpose of pre-approval? This makes you competitive compared to other home buyers. Sellers are more likely to accept a buyer who’s already been pre-approved for a mortgage because they know your financial picture has been vetted by a professional.
Pre-approval requires the borrower to prove their financial stability as well as their financial history. The lender will do this by checking your employment, income, your credit score, your credit report, as well as viewing your debts and sometimes assets.
In order to be pre-approved for a mortgage, you’ll need to provide all or most of this information:
- Pay stubs
- W-2 form
- Monthly expenses
- Summary of assets
A lender will also want to see if you already own property. If so, provide a copy of your home insurance policy and your mortgage statement.
After you’re pre-approved, the buyer will receive a pre-approval letter. Your pre-approval letter will state the expected interest rate for your mortgage, how much you can borrow, and other terms of the mortgage.
From here, you can use this letter to aid in the home buying process. Submit this letter when you put in a purchase offer.
This letter is good for 120 days with most lenders. If you can’t find a home in that amount of time, the lender will have to look at your credit report again.
Keep in mind, pre-approval isn’t a guarantee you secured a mortgage or that a seller will accept your offer. But pre-approval does show you’re a serious and qualified home buyer.
What Does Pre-Qualified Mean?
Pre-qualification involves many of the same steps; however, you’re not formally approved for a mortgage. Instead, a lender will gauge your financial stability to determine if you’ll be qualified for a good mortgage.
This is an ideal option for those who aren’t ready to buy a house immediately but want to see what type of mortgage they may have. A lender can also introduce you to various mortgage options.
If you want to know how to get pre-qualified for a mortgage, you’ll first contact a lender. During the pre-qualification phase, you’ll explain any debt you have, your credit score and history, assets, and income. However, this process varies between lenders — some may even conduct a credit check.
After a lender has this information, they will have a better idea of how much you can borrow.
The Benefits of Both
Even though pre-approval and pre-qualification are different, both come with their benefits.
Overall, both processes can give buyers a view of what they can afford. Buyers don’t have to worry about looking for expensive properties or wondering if a particular home is in their price range.
While pre-approval goes a step further and states your expected mortgage, you can also gain useful affordability and mortgage expectations with pre-qualification.
If you opt for pre-approval, you can speed up the buying process. Sellers will see you as an ideal buyer, making it more likely they will accept your offer.
The Major Differences
What is the difference between being pre-approved and pre-qualified for a mortgage? While mortgage pre-approval and pre-qualification have many similarities, they are overall different processes. The major differences include:
- There’s no application necessary with pre-qualification but there is with pre-approval
- Pre-approval includes a formal review of your finances while pre-qualification doesn’t
- Pre-approval requires a credit history check. Pre-qualification doesn’t but some lenders may still conduct a credit check.
- When pre-approved, your lender will give you a specific loan amount while pre-qualification doesn’t guarantee a loan amount
Weigh out these pros and cons to know which option is best for you.
What to Do After Getting Pre-Approved for a Mortgage
After pre-approval, you can search for homes. Find ones within the affordability terms of your mortgage. After you find your home, make an offer.
If the seller accepts your offer, the buying process is expedited. Since you already have a lender, you can hand over the purchase agreement.
From here, the lender hires a third-party contractor for a home appraisal. As long as the home is in good shape and meets certain market criteria, the appraiser should value the home at the sales price and will approve the buyer for a mortgage. Keep in mind, your lender will verify your credit and income again, so avoid making any changes during the buying process unless you get the “okay” from your lender.
What to Do After You’re Pre-Qualified for a Mortgage
Home buyers have two options: you can decide to wait to buy a home or start your search immediately. Pre-qualification is just a view of what you can afford, you’re not formally approved for a mortgage.
What if you decide to search for a home? Like pre-approval, a lender will give you a pre-qualification letter. Give the letter to the seller or real estate agent.
Even though this isn’t a formal approval for a mortgage, it’s still beneficial for sellers and real estate agents. It proves you’re a serious buyer who’s taken the time to evaluate their financial situation and that you’re already working with a lender.
Want to Get Pre-Qualified or Pre-Approved for a Mortgage?
If you want to prove to a seller or real estate agent you’re a serious home buyer, it’s recommended you’re either pre-qualified or pre-approved for a mortgage. You’ll have better insight into your mortgage approval and what you can afford.
Before you start your home search, find a reliable lender who will set you up with the right mortgage.
If you’re in Oregon or Washington, your lender search is over. Contact us today!