By Rebecca Lake
Buying a home is no small feat and finding the right property is the easy part. Getting your financing in order so you can actually complete the purchase usually requires jumping through quite a few hoops before the deal is done.
When you've already been pre-qualified for a mortgage you may think that getting a loan is guaranteed, but that's not always the case. Aiming for pre-approval instead ups the odds of being able to get the home you want so it's important to understand what the difference is between the two.
How Mortgage Pre-Qualification Works
Pre-qualification is sort of like the opening act at a concert–it's a warm up for what's coming but it's not the main event. Getting pre-qualified is something you'll do fairly early on in the mortgage process and it doesn't involve quite as much work as pre-approval.
Generally, you'll give your prospective lender a brief rundown of your income, assets and debts. If you're in the process of comparing rates at more than one lender, you may want to go through the pre-qualification process with each of them. Once the lender has an idea of how much money you're making, what kind of cash you have in the bank, and how high your expenses are, you'll get an estimate of how much mortgage you could reasonably qualify for.
Many lenders offer pre-qualification online, while some will do it over the phone. You can always go down to the bank in person and regardless of which option you choose, getting pre-qualified shouldn't cost you anything. At this stage in the game, your credit history and score don't come into play, so you don't have to worry about your credit getting dinged because of multiple inquiries. The downside is that your pre-qualification estimate may not be 100% accurate since the lender's not taking your credit into account.
The goal of pre-qualification is to help you figure out whether where you're financially strong enough to move forward with the home-buying process. The lender may make suggestions about what kind of mortgage products you should be looking at or things you may need to do to improve your financial picture. It doesn't mean, however, that you're going to be able to borrow the amount you're pre-qualified for. That's where pre-approval becomes important.
What's Involved in the Pre-Approval Process
Pre-approval is much more intensive than pre-qualification but it's designed to give you a clearer picture of whether you're in a position to buy and what you can afford. You'll still need to provide the same information about your income, debts and assets but this time, you'll need to give the lender appropriate documentation to back it up. This typically means showing copies of your bank statements, tax returns, credit card statements and pay stubs.
At some point, the lender will also pull a copy of your credit report to verify the information you've provided and look for any potentially negative marks, such as late payments or collection accounts. The lender may charge you a fee for the credit check.
If something shows up on your report that the lender has a question about, such as a delinquent debt, you'll likely be asked to provide a written explanation before the pre-approval can be completed. Since the lender is taking an in-depth look at your credit, there's the chance that your score might take a small hit but the impact may be minimal if it's already high to begin with.
When your pre-approval is finalized, you'll be given a written notice outlining how much mortgage you're eligible for and what kind of interest rates apply. If you haven't picked out a property yet, this can give you a better idea of what kind of price range you should be looking at. Pre-approval letters are typically good for anywhere from 45 to 90 days, so that gives you a decent window of time to find a home that fits your budget
Why Getting Pre-Approved Is the Smart Move
Getting pre-approved for a mortgage versus just being pre-qualified can work to your advantage in a couple of different ways. First, it gives you a more realistic view of what you can afford. If you've been looking at listings for homes in the $500,000 range but you can only get pre-approved for half that amount, that may mean you need to adjust your expectations. Pre-approval can also tell you what financial issues you need to address in order to make yourself a more attractive mortgage candidate.
For example, one of the things lenders look at is your debt to income ratio, which is simply the amount of liabilities you have versus what you're bringing in each month. Ideally, your debt to income ratio should be around 30% but if yours is significantly higher, that could prove to be a major obstacle to buying a home. Improving it may be as simple as paying off those high-interest credit cards or whittling away those student loans.
Pre-approval also comes in handy once you're ready to make an offer on a home. When sellers see that you've got a bank who's already willing to back you up, that alone may be enough to persuade them to move forward with the sale. If all you've got is a pre-qualification, they may worry that financing is going to be an issue and pass you up in favor of another buyer.
Final Thought
Confusing pre-qualification with pre-approval is an easy mistake to make but it's one you should avoid at all costs if you're serious about buying a home. Knowing how much you're able to borrow, what kind of rate you can expect to pay and how your credit is influencing the lender's decision can mean the difference between realizing your dream of becoming a homeowner and remaining a renter.
REALTOR®, Broker, ABR, e-Pro, SFR, BPOR
Crye-Leike REALTORS®
Direct/Text: 423-463-0024
Fax: 423-370-1999
Office: 423-473-9545 x217
