As you prepare to purchase a home, chances are you’ve come across the terms mortgage pre-approval, mortgage pre-qualification. What’s the difference between the two? Read on…
Both can help estimate the loan amount that you will likely qualify for. The rule of thumb is Prequalification is good, but Preapproval is best.
Regardless of whether you have a pre-approval letter or a pre-qualification letter, both can help show sellers that you’re a serious contender when submitting your offer.
Each can help demonstrate that you have a good chance of being approved for a mortgage for the amount that you’ve offered on the home.
It’s important to remember that neither is a guarantee that you’ll receive a loan from the lender. You are also not obligated to get a mortgage form the lender who pre-approved or pre-qualified you. While many home shoppers opt to apply for a mortgage with the lender who pre-qualified or pre-approved them, you should always shop around before applying for a mortgage.
Pre-qualification is often seen as the first step in the mortgage process, and pre-approval is the next step. With pre-qualification, you’ll supply an overview of your financial history to the lender, including income, assets, debts, and credit score. The lender will review this information to give you an estimate of what you would qualify for. Mortgage pre-qualification doesn’t always require documentation of your financial history; it can often be self-reported.
Mortgage pre-approval is very similar, but it usually requires documentation and verification of your income, assets, and debts. And it will require a credit check, which will result in a hard inquiry on your credit report.
Pre-qualification can be done over the phone or on the internet, and there is usually no cost involved. Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home.
Because it’s a quick procedure – and based only on the information you provide to the lender – your pre-qualified sum is not a sure thing; it’s just the amount for which you might expect to be approved. For this reason, being a pre-qualified buyer doesn’t carry the same weight as being a pre-approved buyer who has been more thoroughly investigated.
Getting pre-approved is the next step, and it tends to be much more involved. You’ll complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documentation to perform an extensive check on your financial background and current credit rating. With pre-approval, you will receive a conditional commitment in writing for an exact loan amount, allowing you to look for a home at or below that price level. Obviously, this puts you at an advantage when dealing with a potential seller, as he or she will know you’re one step closer to obtaining an actual mortgage.
The final step in the process is what’s called a “loan commitment,” which is only issued by a bank when it has approved you, the borrower, and the house in question. This means the home should be appraised at or above the sales price. Your income and credit profile will be checked once again to ensure nothing has changed since the initial approval.A loan commitment letter is issued only when the bank is certain it will lend, so the commitment date on your purchase contract should be closer to closing than to the date of your offer.
Want to know more about the process? Call us at (212) 941-2583 or email us and we are happy to answer any questions you have and even put you in touch with one of our favorite mortgage bankers to get you started.