What’s The Difference Between Mortgage Prequalification And Preapproval?
If you are considering a home purchase, you may have come across the terms “Mortgage Pre-Qualification” or “Mortgage Pre-Approval.” The terms sometimes appear to be used interchangeably, though they are distinctly different processes with different implications for your home search. So what’s the difference between mortgage pre-qualification and pre-approval?
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.
While both of these financial screening processes can help estimate the loan amount that you will likely qualify for, the rule of thumb is pre-qualification is good, but pre-approval is better. Here’s why.
Pre-qualification is often seen as the first step in the mortgage process. With pre-qualification, you’ll supply an overview of your financial history to the lender, including income, assets, debts, and credit score, if you know it. The lender will review this information to give you an estimate of what you would qualify for. Mortgage pre-qualification doesn’t usually require documentation of your financial history; it is often self-reported.
Pre-qualification usually just takes a few minutes over the phone or can be done based on a short online application process. Loan pre-qualification does not include an analysis of your credit report or an in-depth look at your ability to purchase a home. Remember, the lender is taking your word for your financial history and financial resources. That means that if you leave something out — either accidentally or purposefully — the lender’s assessment of your financial fitness may not be accurate.
The benefit of pre-qualification is that it can be a valuable first step in helping you to get a rough idea of the price range you might potentially qualify for, as well as giving you the opportunity to start putting together your financial records in preparation for pre-approval and, eventually, a mortgage application.
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 during a negotiation as being a pre-approved buyer who has been more thoroughly investigated.
Mortgage pre-approval is a similar idea, but it requires documentation and verification of your income, assets, and debts. A pre-approval will also require a credit check, which will result in a hard inquiry on your credit report.
In order to be pre-approved, you’ll complete an official mortgage application and usually pay an application fee. You will 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 that you’re one step closer to obtaining an actual mortgage.
Pre-Approval and Your Home Negotiation
How does the pre-approval process benefit you when you are making an offer on a home?
- Pre-approval ensures that you are focused on a price point that you can actually afford during your home search. As a home buyer, there is nothing as discouraging as falling in love with a home, then finding out that there is no way to make the numbers work. Pre-approval helps you focus on a realistic purchase price before you spend time on a fruitless search.
- In a multiple-offer situation, pre-approval gives you a distinct advantage over both pre-qualification or no financial screening. One of the primary factors homeowners consider when evaluating offers is the strength of the financing. When the goal is to get to the closing table, the offer with the best chance of getting funded usually wins out.
- Pre-approval makes you seem more serious and committed to the home buying process than pre-qualification or no financial screening. The fact that you have submitted to a credit check, researched and provided concrete financial records, and had your employment verified all tends to suggest to the seller and his or her broker that you are in it for the long haul.
Both you and your real estate agent or broker will benefit from pre-approval when it is time to make an offer. It allows your agent to negotiate on your behalf with confidence, knowing that you will be able to back up your offer and make it to closing day.
Underwriting and Loan Commitment
Once your offer has been accepted, you’ll start moving forward through the underwriting process. This usually involves a fair amount of time and effort as you provide records to document every aspect of your financial life. You’ll need to account for all of the money that comes in or out of your accounts during this time.
There will be a lot going on during underwriting — home inspection, moving arrangements, home repairs, and more. It is essential that you prioritize providing your lender with the records requested by the underwriting officer. Remember, they can’t move forward until you provide the items they are waiting for, so it is up to you to act promptly.
The final step in the mortgage 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. Your real estate agent will talk to your lender to get a timeline estimate for your final approval.
As you get closer to closing on your new home, you’ll be told how much money you need to provide at the closing table. You will also get instructions on how to provide that money — certified check or bank wire transfer. Be sure to check with your bank ahead of time to find out how long it takes for them to cut a check or wire money so that your funds will be ready when you are.
Be sure and check with your financial advisor to determine what fees, taxes, and other line items from your closing statement are tax deductible. You’ll also want to discuss the tax implications of your home purchase and your mortgage interest and property tax deductions.
Mortgage Do’s and Don’ts
The process of obtaining a mortgage ideally starts long before you start your home search and continues all the way to the closing table. Here are some of the main things to keep in mind.
- Start early gathering together your financial records including paystubs, prior year tax returns, employment records, and more.
- Discuss with your lender problematic factors in your credit or financial history. An experienced lender can help you understand your options, but only if you share your concerns with him or her.
- Learn about grants and incentives that might help you put together money for your down payment, closing costs, or other elements of your purchase. These may increase the loan amount you can be approved for.
- Consider your lifestyle when determining your price range. If you want plenty of money left for travel, socializing, or home renovations after you buy a home, you won’t want to borrow the maximum amount for which you’re approved.
- Remember that a pre-approval only lasts for 60-90 days. If your home search takes longer — or if it is interrupted for a few weeks — you need to be prepared to get a new, up-to-date pre-approval.
Don’t do anything that will change your financial picture once you have begun the mortgage application process. In fact, it’s a good idea to hold off on new credit cards and major purchases for up to six months prior to your mortgage application.
Many home buyers are excited at purchasing a home and proceed to finance furniture, home decor, or even a new car to go with their new home. This can completely change your credit score and your income to debt ratio, causing your financing to fall through.
In addition, your parents or grandparents may choose to gift money to you to help with your down payment or moving expenses. This too must be accounted for and can cause your loan to be delayed in underwriting until the loan officer is satisfied with the source of the money.
Got your final approval? You still can’t start spending. Many lenders do a final audit in the days leading up to closing, and a major change in your finances can trigger a review that delays or even undermines your ability to close.
Be sure to discuss with your lender a variety of mortgage products and scenarios. While you might have a large down payment saved, you may find that the home you’ve chosen requires extensive repairs or improvements. In that case, a lower down payment mortgage may make more sense.
It’s important to remember that neither pre-qualification nor pre-approval is a guarantee that you’ll receive a loan from the lender. You are also not obligated to get a mortgage from 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.
Want to know more about the process? Email us at [email protected] 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.