Pre-Qualified v. Pre-Approved: What’s the Difference?
Many times a first time home buyer is confused by the terms Pre-Qualified and Pre-Approved. It has also been this confusion that has lead to deals falling through and potential homebuyers losing their dream homes. There is a significant difference between pre-approved and pre-qualified, so we will clear up the terms.
A pre-qualification takes general information that basically says you are creditworthy. Nothing is verified in this process, but it does give an estimate of how large of a mortgage you can afford. The process of pre-qualification is usually free and takes less than 2 hours and is the first step in the mortgage process.
The lender will collect information about your debt, income and assets to create a big picture of your finances. This is not verified at this stage, however, so you are not offered a loan at this stage. In fact, this stage can happen over the phone or internet, rather than in person. This is part of the reason why television commercials and other advertising focuses on this stage. It causes you to call so that they can then move you into the next stage of the mortgage process. In a pre-qualification, your credit report is not checked, but the lender can explain some mortgage options based on your goals and situation.
It is non-binding to the lender, which means there is no contract created. They could begin the pre-approval process and deny a loan. It is for this reason, the pre-qualification should only be used to understand your budget limits and make changes to your credit or expectations. From a pre-qualification you may determine it is not yet time to buy a home. Overall, the pre-qualification is more for your information than to begin the home buying process.
From here, you can begin to clean up your credit and choose a lender to work with. You will also want a Realtor so you can begin to get educated about the market.
The second step of the mortgage process is pre-approval. This stage begins the formal contract that will become the loan. It begins with a mortgage application and associated fees that will cover processing the application including running a credit report. The lender will ask for documentation on your assets, liabilities, income and debt. In the pre-qualification, you provided general information, but now the information will be verified and examined.
After this review, the lender will be able to give you an idea of your mortgage rate and loan amount based on your credit score. The pre-approval, means you are able to begin looking for a home within the budget of the conditional approvement. This gives you a stronger position when making an offer, as you now have lender backing you to state you have funds.
Once you have found a home, the lender will provide a loan commitment for that specific property. They may again verify information to make sure there are no changes to your credit or income situation. Significant changes could cause the loan to fall through, so it is important there are no major changes.
Pre-Qualification vs. Pre-Approval Summary
Pre-qualification is the first step and pre-approval is the second step in the mortgage lending process. Pre-qualification is mostly for you to understand where and if you should begin the second step. Pre-approval is a conditional contract between you and the lender that puts you in a position to begin looking for a home.
For more information: http://www.investopedia.com/articles/basics/07/prequalified-approved.asp
When we work together, I will help you understand what you really need, versus what is hype, so you can go into your new home in a strong position to get exactly what you are looking for, as smoothly as possible.