Before you begin house hunting, the first essential step would be to apply for a home loan.
Applying for a loan will help you understand how much you qualify for which will save you loads of time by looking at the right priced homes. Once you’ve started this step you may routinely hear the terms “loan pre-qualification” and “loan pre-approval”. If you are in the market for a new home loan you need to understand the difference between the two terms.
This term means that you are qualified to obtain an approval for a home mortgage loan. It does not mean that you are actually approved for a loan.
The pre-qualification is based on:
- Income and Debt (debt to income ratio)
- Credit Check (credit is not always pulled for a pre-qualification)
The pre-qualification process is quite simple. You supply the lender with your overall financial status which will include your income, debt, and your assets. The lender will evaluate the information and give you an idea of the loan amount you qualify for. Pre-qualification can be done over the phone or the internet and there is usually no fees involved except for a credit check fee if applicable.
Loan pre-qualification does not include an analysis of your overall financial capability of owning a home but is more along the lines of an estimation.
During the pre-qualification process you can discuss any of your goals or needs that you may have regarding the home loan. Do not lie in regards to how much income you’re making, or how many assets you have because all of this information will be verified.
Pre-qualification is a quick process, and is based only on the information that you provide to the lender. Because of this your qualification isn’t a sure thing. You can expect to get approved for the amount that you qualify but it is not set in stone.
In conclusion a pre-qualifed buyer doesn’t carry the same weight as a pre-approved buyer.
Getting pre-approved is the next step. Pre-approval requires a little bit more time, and paperwork. The main difference is that the lender actually verfies your income, assets, creditworthiness, etc. A credit check is required, you will have to provide the lender with your W2’s, paystubs, bank statements, asset statements, etc. You’re debt to income ratio is analyzed to determine if you would make a good borrower.
Once a pre-approval is issued you know exactly what amount you can borrow for a home loan. This option gives you an advantage when dealing with a potential seller, because the seller will know that you are much further along in the process of obtaining a loan than a borrower who is just pre-qualified.
Pre-Qualification vs. Pre-Approval
The pre-approval is better because it is much more complete, formal and finalized. Pre-approval provides much more confidence for both the buyer and the seller and it’ll increase your negotiating power.
Pre-approval and pre-qualification are not the same thing.