What’s the difference between a mortgage pre-approval and a pre-qualification? The short answer is: a lot.
They sound similar, but mortgage pre-approvals and pre-qualifications are quite different. Start your home buying process by learning the difference between these terms.
What is a Mortgage Pre-qualification?
Simply stated, a mortgage pre-qualification is an estimate of what you can afford. You will learn how much can spend, but there is no guarantee that you will be approved for a loan. So what is it, exactly? It is a written statement from a lender that says you are likely qualified for a mortgage up to a certain dollar amount.
This is a good thing, right? In theory, yes. But in reality most sellers will take this letter with a grain of salt. It’s better than nothing, but the seller and their agent will understand there is no guarantee that you will be approved. This is because very little of the information you have shared with your lender has been verified.
What is Mortgage Pre-approval?
The FDIC defines a mortgage pre-approval as a written commitment issued by a lender following a comprehensive analysis of overall creditworthiness.
So what does this mean? This means your bank has begun the process of verifying your information. Your lender will verify such information as:
- Income, W2s, tax returns, and other proof of income
- Employment, recent paystubs
- Financial resources, assets, liabilities
- And other areas associated with your credit profile
Requirements for pre-approval
According to the FDIC, a mortgage pre-approval is usually conditional upon:
The identification of a suitable property. Meaning you will need to find a property that you want to purchase.
Continued creditworthiness. The FDIC notes that there is no material change in your creditworthiness or overall financial condition prior to the close of sale.
Additional terms. The lender will add these. Examples include: a home inspection, pest/mold inspections, and an acceptable title insurance binder to name a few.
What it means
A mortgage pre-approval letter from your lender suggests a credit decision has been made. It also implies that a lender is likely to grant a mortgage commitment. For some lenders, this could be the point where the loan has been submitted to underwriting.
A seller may be more more enticed by your offer if it includes a mortgage pre-approval letter. While not a 100% guarantee you will be approved for the loan, it is considered a valuable step in the process.
The Reasons to get a Mortgage Pre-approval
Any potential buyer who is looking to put in an offer on a property should consider working with their lender in advance to get a mortgage pre-approval. There are several reasons why.
Reason 1: Credit hiccups happen
Remember that $20.00 you owed the dentist 3 years ago? No, you don’t, and that’s why you didn’t pay it. But your credit report remembers. Things like this happen. Also, there can be erroneous information on your credit report that you have no idea about. Before your mortgage is approved these things will need to be addressed. It’s best to have a lender assess your credit before you start looking for a new home.
Reason 2: It helps set realistic goals
Your lender will help you understand what type of financing is right for you, based on your financial situation. In addition, by working with your lender, you’ll get help in understanding the ins and outs of obtaining a First Time Home Buyer program / FHA loan, or other special types of loans. These loans require specific inspections, and could influence your decision while looking at homes, choosing which home you may want to make an offer on, and can even influence what your offer will contain – specific fixes or concessions, special inspection contingencies.
Reason 3: Personalized advice
Additionally, your lender will work with you to determine how much you could comfortably afford to spend. They’ll do this by verifying your income versus debt. You’ll want to know that you’re selecting a home in a price range that you can afford, and that you can be approved for.
There are many other items a lender may verify before giving you a mortgage preapproval. Having the verifications done, and your letter in hand, when you make an offer is a great start to negotiating. Your offer will also appear more appealing to a seller. You will look more likely to get a mortgage commitment, and ultimately close on the sale in a shorter period of time because you’ve already started the process.
Start with a lender
There are many advantages to getting a mortgage pre-approval instead of a pre-qualification. You should work with your lender to see which one is right for you.
To get started on your mortgage pre-approval today, visit HUNT Mortgage.