Mortgage pre-approval versus pre-qualification – these terms are often used interchangeably by homebuyers and some real estate professionals. But they are not the same. The terms have different meanings and it is important that potential buyers know the difference.
Below, we’ll explore mortgage pre-approval versus pre-qualification, and learn what the differences are and when each is the smart move.
Mortgage prequalification occurs when you submit basic information to receive an interest rate quote. The process is usually quick and informal. However, it is not an actual obligation to lend you money.
A mortgage pre-approval, on the other hand, is a thorough process of verifying the information you submit. A mortgage pre-approval is a commitment from the lender that – if all circumstances remain unchanged at the time the final loan application is submitted – the loan will be approved. Having a pre-approval letter in hand can go a long way in shopping for a home.
Below we’ll cover more details on pre-approving mortgages versus pre-qualifying, and finding out which tool is right for you in specific circumstances.
Mortgage Pre-Approval vs. Prequalification: which is better?
When it comes to pre-approving mortgages versus pre-qualifying, it is important to consider the two distinct purposes. Pre-approval is an obligation to lend. Pre-qualifying is a quick and easy way to find out about mortgage options if you are planning to buy a home.
When deciding between pre-approving mortgages and pre-qualifying, the most important thing to know is that not everyone can get pre-approved, almost anyone can get pre-qualified.
Anyone can get a mortgage pre-qualification as it is based on the information you provide. For a “pre-qual” mortgage, most lenders do a soft credit check that gives them your creditworthiness and some details, but not your full credit history. (By the way, this kind of “soft” pull doesn’t affect your score at all.) The lender generally doesn’t verify employment, review your financial documents, or validate your assets for pre-qualification.
Here is an example of pre-approving a mortgage versus pre-qualifying. The US bank uses pre-qualification to determine if a borrower’s debt to income ratio is within their lending standards, but does not review detailed information about the borrower or conduct a credit check. However, the information in your application must be verified for pre-approval.
This does not mean that pre-qualification does not make sense. Mortgage pre-qualification can be a great first step in your buying process. Use a pre-qualification to learn how much you can afford to take out credit before looking at a home.
Mortgage Pre-Approval Versus Pre-Qualification: Which Process Takes Longer?
Keep in mind that when it comes to weighing pre-approval of mortgages versus pre-qualifying, you can usually apply for pre-qualification and get results in minutes.
It will take a little longer to pre-approve the loan as the credit insurer will verify all of the information you have provided. A pre-approval is basically a mortgage application without a specific home attached to the application. The lender will review your credit report and review your employment history, income and assets.
Even with a higher level of scrutiny, if the lender can digitally verify your information, your pre-approval could be ready in a day. In some cases, you may have to wait two to three days for a response.
Here is a selection of items you may need to show to the lender in order to pre-approve a mortgage (this list is by no means exhaustive):
- Your home address (es) in the last two years and contact information for landlords, if available
- Account statements for all check, savings and other asset accounts
- Pay stubs from the past 30 days
- W-2s for two years
- Your social security number so the lender can check your credit report and score
You may be asked to provide additional documents if they apply to you, such as: B. Proof of child support or documentation of any gift items you intend to use.
Many lenders offer free mortgage pre-approval, but there is a fee. Obviously, if you are asked to enter a credit card number when submitting your application, that is a good indication that you will be charged a fee. The lender can refund your application fee when you take out the loan.
Once you have been pre-approved for a mortgage, the lender will send you a pre-approval letter for the mortgage. The pre-approval letter will provide information about the lender, the home loan program you have been approved for, and the maximum amount they are willing to lend you. (Some lenders also offer a pre-qualification letter, but again, it’s not a lending requirement.)
Pre-approval of a loan can help you tremendously as a potential buyer
When weighing the pros and cons of pre-approving mortgages versus pre-qualifying, keep in mind that a mortgage pre-approval letter can be an important shopping tool. The last thing a seller would want is to take their home off the market for a month or more only to be listed again because the buyer couldn’t get a mortgage loan. In fact, some sellers only have pre-approved and cashless offers.
While a pre-approval letter won’t give you the strength of a cash buyer supply – since final mortgage approval comes later – it is the next best thing. Pre-approval lets sellers know that you mean business and that you are prepared.
One important detail to know: Typically, you can request a pre-approval letter for an amount that is less than your fully approved amount. This way, if you want to offer $ 250,000 on a home, you don’t have to tell the seller that you have been approved for up to $ 300,000. Most lenders are happy to provide this letter and it can be an effective part of your negotiating strategy.
Mortgage Pre-Approval vs. Prequalification: which one is required?
Whichever option you choose after considering mortgage pre-approval versus pre-qualification, the final decision is yours. They’re both optional – you don’t necessarily need to get a mortgage pre-approval letter to start buying a home.
However, either can be a useful part of the mortgage process.
First, a mortgage pre-qualification tells you what price range to shop in. This is especially useful for people who have no idea how much house they can afford. It can also alert you of steps you should take to improve your creditworthiness or financial situation before you start your house hunt. For example, if you add just a few points to your credit score, you might find that you could get a better price. A pre-agony can help you learn how firm your stand is.
Mortgage pre-approval states that you can get a loan and for how much. And from a seller’s point of view, it is more likely that a pre-approved buyer can close the home at the agreed price.
Get multiple pre-approvals to help you find the best loan
You can use pre-approval for evaluation when you apply for pre-approval from some lenders and compare offers. You can contact the lenders separately or you can contact a mortgage broker.
Regardless of whether you get mortgage pre-approval or pre-qualification, the lender will tell you the interest rate you qualify for. You might be shocked to know how much of a difference even very small fluctuations in the interest rate make. For a 30-year fixed-rate mortgage of $ 250,000, the difference between a 4.75% interest rate and 4.80% over the life of the loan is nearly $ 2,900 in savings. Why put the money in someone else’s pocket when you don’t have to?
Even if two banks offer you the same interest rate, the fees they charge can vary significantly.
Additionally, applying to some lenders will not affect your credit score. There are specific rules in the FICO and VantageScore credit score formulas that encourage consumers to search for the best mortgage. While your score may go down every time you apply for a new loan, any mortgage application you make within a certain purchase period counts as a single request for evaluation purposes.
That means you can apply for pre-approval from one, two, five, or 100 mortgage lenders. The impact on your credit score is the same – as long as you submit all of your applications in the shopping window. It’s anywhere from 14 to 30 days depending on the rating model (stick with 14 as you don’t know which credit rating model a lender is using).
When it comes to pre-approving mortgages versus pre-qualifying, both are good tools. Shopping during the pre-approval process can save you money. You have nothing to lose except maybe a few hours of your time and this could save you thousands of dollars.
Choosing mortgage pre-approval versus pre-qualifying can be simple. Pre-agony comes when you educate yourself before you shop. Pre-approval comes when it is time to choose a lender and prepare for a quote.
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