Pre-Qualification vs. Pre-Approval
Sharon and Mike immediately fell in love with a updated brick ranch with an awesome backyard, perfect for the kids to play and entertaining. They called a Realtor to submit their offer, but didn't reach out to a lender first. Unfortunately, they soon discovered that they couldn’t qualify for the home after all. They kept looking to find something else in their price range, but the other houses didn't compare. If only they had applied for a loan before looking at houses.
One way to reduce your stress when home buying is to seek pre-approval, actually applying for a loan before finding a house. The loan officer puts together a credit package that includes a loan application, credit report, wages, asset information, and other supporting documentation. The documents are submitted to the underwriter who issues the credit approval or denial.
Buyers who are pre-approved are taken more seriously than their pre-qualified counterparts. Pre-qualification is not a loan commitment from a lending institution; it is only a loan agent’s opinion that you will be able to obtain financing. Verifications are usually not made so a formal approval is not issued. These days, almost anyone can achieve pre-qualification status.
Pre-approval, on the other hand, means that the lender has taken the application through a thorough procedure. So buyers with pre-approval status are more desirable in this competitive market!
Benefits of pre-approval:
1. If you make an offer on a home, you will need to submit your pre-approval letter with the offer.
2. Understanding how much you can afford, will save you time from looking at houses you can’t afford.
3. Shopping for a loan allows you to decide on a house payment that fits your budget. Most people can qualify for more than they would feel comfortable paying.
4. Pre-approved buyers can generally close on the home more quickly.
Remember, neither pre-approval nor pre-qualification are absolute loan commitments. Lenders must still assess property appraisals, verify information, and verify credit before funding the loan. Lastly, if you do get your home offer accepted, do not start shopping for big ticket items, this will affect your debt to income ratio, and your loan commitment could get denied.