What is the Difference Between a Mortgage Pre-Approval and Prequalification?
person CondoGo | watch_later 2022-01-08
What is the Difference Between a Mortgage Pre-Approval and Prequalification?

If you are shopping for a house, you may be confused about the difference between a pre-approval and a pre-qualification. Both have something to do with how much money you can secure for a mortgage loan, but  there are some distinct differences between them.

Here’s what potential buyers should know before setting out in search of their dream home:

What is pre-qualification?

Prequalification is a way for lenders to estimate how much money you can reasonably borrow for a house. It uses a simple algorithm based on your overall financial picture (income, savings, assets, and debts) to provide you with a rough number of what you can expect to be offered. A lender can usually prequalify you over the phone or online, and there is no cost associated with this service.  It can usually be done over the phone or online and there is no cost associated with this service.

The problem is that pre-qualifications aren’t official documents, so many home buyers take them at face value and don’t have a firm budget in mind when they start looking for a home. This can lead to disappointment when they finally find their dream house and they can’t afford it.

What is pre-approval?

That is exactly why it’s important for home buyers to seek pre-approval. This process is a lot more detailed and offers you a firm number on what a lender is able to offer you. . With a mortgage pre-approval, your search becomes a lot easier and you can make a decision with a greater sense of confidence. When you buy a home, you're making a big purchase and it's stressful, but with a realistic idea of what you can afford, you'll be able to make an informed decision.

Now that you know more about pre-approved loans in general, you might be wondering how it’s done. Well, the lender will perform a credit check, confirm how much you earn, determine your financial assets, investments and savings and factor in any existing debts. You will then be asked to provide bank statements and paystubs. The lender will also order a credit report to check your credit rating. The lender will base its final decision on whether or not you reach these qualifications.

For more information about Mortgage, Pre-approval make sure to read our previous article Mortgage Pre-Approval: What Lenders Want To Know.

Advantages to getting pre-approved?

A sizable down payment will also improve your standing with the bank and likely increase the amount you’re pre-approved for. Avoid making expensive purchases before you go through the pre-approval process, and keep in mind that you will need to have additional funds in hand for closing costs and other unexpected expenses that come along with buying a home.

One added bonus to having pre-approval is that many sellers see it as a sign you are serious about buying. They know there are no financial issues or headaches to worry about once the sale is complete and the home is transferred. You essentially have the paperwork to prove that you are ready to pay immediately.

 Pre-approvals: Potential pitchforks in the road to homeownership

Another thing to keep in mind is that pre-approvals are valid for only two to four months, so it's a good idea to start shopping soon if you want the best pick of homes and if you want to avoid repeating the process all over again. The reason for this is that the lender will want to revisit your financial situation at that time to make adjustments based on any changes. This is another reason to be careful about building up too much debt or taking out risky loans during the home buying process.

Going down the home stretch

Once you’ve been pre-approved, the next step is to get a loan commitment. This is the green light that the lender has approved both you and your future home. In this step, the home must be appraised at or above the sale price. If a home inspector or appraiser finds any issues with the home (such as structural problems or outstanding liens), the process will be delayed. This will not negatively affect your chances of getting pre-approved again if you need to.

If you have no problems with the house and your financial situation, the lender will check your portfolio again to be sure your situation has not changed since you were pre-approved. Then they will tell you that you may sign the papers.

 At CondoGo real estate brokerage we’ve helped many buyers and sellers with the process of buying and selling. Whether if you’re planning to buy soon or invest or sell your property you can trust that we will be by your side along the way, and we’ll take care of everything for you and make sure the process will be very smooth for you. Contact us today to get started.