Buying a home can be a big undertaking. For many, it is one of the most important financial decisions of their lives. A lot of money is needed to purchase a property, and the majority of buyers can’t do it with just their cash reserves alone.
This is where a mortgage loan comes into play. For obvious reasons, not everyone can get a mortgage for the home they would like to purchase. Your mortgage lender, your seller, the listing agent, your agent, and also you are all going to want to make sure that you have the financial stability to afford the mortgage and thus the home.
If it turns out that you won’t qualify for the necessary mortgage, that is something you are going to want to know as soon as possible. Otherwise, you will simply end up exhausting a lot of time and energy with nothing to show for it in the end.
This is where pre-qualifications and pre-approvals come into play. They help show everyone, including yourself, that you are in good enough financial standing to afford the property with a loan. Even though these two processes aim to accomplish similar goals, they vary in depth and standing.
Let’s review what they actually are and how they differ.
What is Mortgage Pre-Qualification?
If your plan is to finance your future home with a mortgage as opposed to cash, you are most likely going to need to first get pre-qualified. A mortgage pre-qualification is a pain-free, first step toward determining whether you fit the criteria for a home loan.
A pre-qualification can be granted in a relatively short amount of time, often times it takes one to three days or less. Additionally, it’s an affordable process at little or no cost. A mortgage pre-qualification is used to show a mortgage lender what you can afford.
The pre-qualification will take into account factors including:
- Basic finances
- Debt-to-income ratio
- Down payment
- Assumed credit score
- Employment history
A pre-qualification is based on estimates and what you tell your lender about your financial situation. It’s an informal, nonbinding evaluation, and your actual credit score generally isn’t even pulled during this part of the process. If the information you provide is inaccurate, those discrepancies will come up during the pre-approval process when verification comes into play. This is one of the reasons why the pre-qualification is typically seen as less effective to sellers than the mortgage pre-approval.
It is recommended that you pull your own credit report from a free website early on in the home-buying process. That way, you have a better understanding of where your credit lies. Retrieving your report this way will not actually hurt your score but getting it pulled by a lender will.
Mortgage pre-qualification does not have the same power as a pre-approval. However, it is a useful way to know what kind of loans you are likely to qualify for.
What is Mortgage Pre-Approval?
A mortgage pre-approval is a much more substantial document. This is a written and conditional commitment from either a mortgage lender or a bank. It’s function is to confirm you have been pre-approved for the financing of the mortgage.
You can only obtain this after completing a loan application and supplying verified documentation. These pertain to your assets, employment, and income. In addition to those documents, you will also need running credit. The loan file will have to be underwritten based on the current rates for mortgages.
From this information, lenders will have the data needed to calculate your debt-to-income ratio. From there, they can extrapolate what you can actually afford.
Getting pre-approved not only shows what is actually in your price range. It also proves to the seller that you are a committed buyer and are taking the process seriously.
To be clear, to be pre-approved for a mortgage, you will need to supply:
- A credit report
- Pay stubs
- Tax returns
- Bank statements
For the pre-approval process, a lender will often do a credit check. This means a hard inquiry on your credit report. Be careful during this part of the process because a hard pull can impact your credit score.
If you end up shopping around with different lenders, beware, as this can mean multiple hard pulls and multiple points taken from your score. Credit organizations understand that this sort of thing happens. As such, they usually allow multiple pulls to occur within a limited time frame (often just a couple of weeks). They will just have all of those pulls count as one.
These hard pulls remain on your credit for two years. In that timeframe, lenders will have the ability to see that you have been shopping around after looking at your credit report. Sympathetic lenders may take this into consideration when reviewing your score and history.
Also, be aware that some lenders charge an application fee for the pre-approval, which can end up costing you several hundred dollars.
It is important to note that a pre-approval is usually good for 60-90 days. It is conditionally based on the information in your file. If that information changes or new material comes up, your status of approval may change as well.
We must stress that a pre-approval is not the same as an approval. It does not guarantee that you will receive financing. Even an approval is conditional to you being able to fulfill all of the requirements set forth by the lender.
How Necessary Is a Mortgage Pre-Approval for Buying a Home?
There is no law that states you absolutely need to have a mortgage pre-approval letter in order to buy a home, but houses go quickly nowadays and multiple bids are the norm. With these factors in mind, it is likely that you will not even hear back from the seller without the letter.
By getting pre-approved, you and your seller can both feel better. It’s an assurance that you have the necessary financial status to go through with the financing.
Part of this process has been sped up by modern computers and software, which can process automatically and at lightning speeds. As such, the actual work involved with pre-approving is light. It is even possible to get yourself pre-approved in just a day.
We would also like to note that you are not required to finance with the lender who pre-approves you. In fact, you can use your mortgage pre-approval letter as leverage to get a better deal with a different institution.
Be aware that some lenders use mortgage pre-approval and mortgage pre-qualification interchangeably. These two processes are not the same thing. You should make sure that your lender clarifies what the process entails. It can also be helpful to confer with your real estate agent to get a sense of how important each of these documents are in your market.
What Happens After Pre-Approval?
Congratulations on your mortgage pre-approval! Now, you get to move on to the process of applying for a loan.
As previously stated, you can complete the loan application with the lender who pre-approved you or with a different party. You are not obligated to any specific lender or bank.
After you have picked your lender, you will have to fill out disclosure paperwork and confirm that you intend to continue with the loan application. Determine how much money you want to put toward your downpayment, which will factor into whether you are required to pay for things like private mortgage insurance. After this step, your lender will gather all of the necessary documents – which include the purchase contract and its particulars – so that they can process your loan.
From your lender, it will then go to an underwriter for their approval. This is where the conditions will be written so that the loan can be funded. They will also give you the chance to lock your loan during these early stages. If you choose to lock it in, it will ensure that the quoted interest rates will not change.
How We Can Help You
There are a fair number of differences between mortgage pre-qualification and mortgage pre-approval. But, as we can clearly see, the main difference lies within the fact that a mortgage pre-qualification (or pre-qual as they say in the industry) is merely a good first step. It is not nearly as robust as a pre-approval.
It is helpful to have both a pre-qualification and pre-approval. This will allow you to know what kinds of properties you can actually afford. It also allows you to act quickly when you find the home that is most ideal for you.
Here at Streamline Mortgage Solutions, we work with our clients to help get them the best pricing in the industry. In fact, Orlando Magazine recently ranked us among the Top Rated Mortgage Brokers in Central Florida. And we even offer our services across the entire state of Florida.