Pre-Approval vs. Pre-Qualification

Pre-Approval or Pre-Qualification

Content prepared by Towne Mortgage of the Carolinas for Coldwell Banker Howard Perry and Walston

You’ve probably heard the terms pre-approval and pre-qualification thrown around as you prepare to purchase a home. While they might sound alike, don’t make the mistake of believing that they are the same thing. Think of pre-qualification as the very first step of the mortgage process. It’s a simpler process than being pre-approved, and therefore, does not carry quite as much weight. There are more steps in the pre-approval process because it requires documentation and verification of your financial history. 

So, what is pre-approval?

A pre-approval is a written statement from a lending institution in which the lender tentatively commits to lend a borrower, upon underwriting review, a fixed loan amount. The letter of pre-approval is based on proof of income, proof of assets, credit reports and debt.

“The pre-approval involves receiving and verifying the borrower’s documents. This would involve receiving the borrowers last two months’ bank statements to verify that funds are available for a down payment and closing costs, 30 days of current pay stubs, the last two years of W-2s or 1099s, and the last two years of signed Federal tax returns and all schedules. Addresses of employment and residences for the last two years are also needed. This information will verify that the borrowers are qualified and ready and able to purchase the home in the amount they are qualified for,” says Brian Summers, Loan Officer with Towne Mortgage of the Carolinas.

While it offers a strong indication that a borrower’s loan will be approved if all the appropriate actions are taken, pre-approval does not guarantee a loan until the property has been inspected and the underwriting process is carried out. “A pre-approval makes the borrower a better buyer but does not fully approve the buyer. Final approval is accomplished when a written application is submitted to a processor and then delivered to an underwriter who makes the final determination of the buyer’s loan approval,” said Summers.

What are the benefits of pre-approval?

A pre-approval can help you identify and address financial issues early on. During the pre-approval process, lenders can detect any potential problems that might make it difficult for you to obtain a loan. The sooner you uncover and correct these problems, the better.

Getting pre-approved will also help you better define your home search because you’ll know exactly what you can afford. Knowing your limit makes the home shopping process more efficient as you won’t waste time with listings out of your price range. It will also save you from the heartbreak of falling in love with a home you can’t afford.

A letter of pre-approval can even help you score your dream home by giving you more leverage in negotiations with the seller. Compared to an offer that is not pre-approved, your offer will be more appealing to a seller as it is less risky. This is especially beneficial in a hot real estate market where a seller may receive multiple offers on their home.

What is pre-qualification?

Pre-qualification is a fairly simple process and can be done without documentation. During pre-qualification, the loan officer takes financial information from a borrower and then makes a tentative assessment of how much they would be qualified to borrow. “The pre-qualification is based on a conversation with the borrower. This can be done via phone, in person or inputted online. Information that is taken includes job history, addresses of residence for the last two years, current gross income, and a credit report. Based on credit scores and stated income, I can communicate to the borrower what mortgage amount they can qualify for,” said Summers.

What are the benefits of pre-qualification?

Like pre-approval, pre-qualification can also help you to better define your home search. “The purpose of getting pre-qualified allows the borrower to shop in their price range of affordability. There is nothing more disappointing for a buyer than to fall in love with a house that they cannot afford,” said Summers. “Getting pre-qualified also helps the buyer budget correctly for down payment and closing cost. Another benefit for the borrower is it will help place them in the right loan program, such as a VA, FHA, USDA or a Conventional program. The pre-qualification will determine if they will need a 100 percent loan program or a program that offers a down payment assistance.”

How long does each process take?

Because the pre-qualification process does not require any documents or verification, it typically does not take more than 30 minutes, depending on your loan officer or lending institution. “A typical pre-qualification takes 5 to 10 minutes to complete since I am just taking the borrowers’ info,” added Summers.

It typically takes a couple of days to receive a letter of pre-approval because documents need to be received and verified.

There is no cost to the buyer to go through the pre-qualification or pre-approval process.

Which one should you choose?

It takes more work to get pre-approved, but it’s worth it, as you’ll save a lot of time in the long run. “It is best to get pre-approved to be a better buyer in this market,” said Summers. Being pre-approved will give you more leverage over other buyers who have not been pre-approved, which is a huge benefit in today’s market.”

Always remember that your pre-approval is based on certain conditions. A lending institution will always reevaluate your financial situation with a recent copy of your credit history and other information before closing on a loan.

After obtaining a pre-approval, you shouldn’t take out any credit. Opening a new credit card or applying for a car loan will affect your credit score negatively and may cause an increase in your interest rate or leave you unable to close on the mortgage.

After knocking out the pre-approval process, you can go out and house hunt with confidence!

Towne Mortgage of the Carolinas

Content prepared by Towne Mortgage of the Carolinas for Coldwell Banker Howard Perry and Walston

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