People commonly use the terms pre-approval and pre-qualified interchangeably when they are in the market to buy a home. However, these are two different concepts, and it’s important to understand the difference between the two. One is an estimate, the other is a tentative commitment, and neither is guaranteed.
Pre-Qualification is the First Step
When you call a bank and get pre-qualified, it means that the lender has reviewed your income situation and advised you on how much you will probably qualify for. It’s a good idea to get pre-qualified before you even start looking because it can give you a good idea of your price range.
When you call for a pre-qualification, you will need to sit down with key financial information. You will inform the lender of how much cash you have for a down payment, what your assets are, income information and your list of debts. Pre-qualification is free, and there is no commitment for either party. While this gives you a general idea of how large a mortgage you might be approved for, it is not an actual approval from the lender.
Pre-Approval is a Step Up
The numbers on paper that a lender uses to determine how much house you can afford must be compared to what shows on your credit check. A bank cannot underwrite a loan without pulling the credit history to make sure there are no judgments, liens, or other issues that would interfere with the home loan. Based on the same financial information provided in a pre-qualification and the credit report, there is usually an application fee involved with pre-approval.
While pre-approval is a tentative commitment, it is not actually a guarantee of approval. There are still issues that can arise to prevent the loan from going through. The lender will still need to see a property appraisal, perform a title search, and perform some other verifications on the property. However, a pre-approval means that your final approval process will go much faster when you do find the home of your dreams.
A Time Consuming Process
Buying a home is a major investment and a time consuming process. Most people do not choose a home and go to closing just a few days later. You can expect the entire process to take at least a few weeks. Getting pre-qualified is fast and easy, and it allows you to determine what your purchasing budget will be. However, you should return to the bank for a pre-approval as quickly as possible. The bank can run your credit and work with you on any potential issues while you continue your search for the perfect home. When you find the property of your dreams, you will be that much closer to the final approval.
Buying a home is exciting, and it’s understandable that you may be anxious to head out and start shopping for the perfect place to call home. However, you don’t want to start shopping until you have talked to a banker to determine what you can qualify for. Otherwise, you could wind up heartbroken when the homes you are in love with prove to be out of your budget, or you may settle for a smaller home than you could actually afford. Return to the bank as soon as possible to get an official, signed pre-approval to simplify the process when you put an offer in on a house.
About the Author: Jannie Louie is a freelance writer who blogs about the loan process involved in buying a home. You can secure loans to buy a home through Net Loans.